Vote by House to End Puerto Rico Securities Law Exemptions

On Monday, the U.S. House of Representatives passed a bill that would take away exemptions from federal securities law for those offered in Puerto Rico and other U.S. territories that the Securities and Exchange Commission (SEC) administers in the U.S. Currently, Puerto Rico and the other territories have the ability to issue their own rules, Nydia Velazquez’s (D-NY) bill would be able to extend protections to citizens in the territories. The U.S. Territories Investor Protection Act of 2016, would apply federal rules to securities offered and issued only in the territories. Some of the reports have states that some issuers of securities in the country have basically become their own underwriters, packaging and selling securities without disclosing that conflict of interest.

The bill was passed on a bipartisan vote on Monday afternoon by voice, and ends one of the long-standing exemptions in the Investment Company Act for territorial securities. It also provides exemptions for closed-end investment companies, employees’ security companies and others. The bill is expected to help investors in securities get a better idea of the risks associated with them. The bill also builds a three year grace period for companies to comply with the new rules, as well as giving the SEC the power to extend that deadline. It also establishes a seven-member board with power over the island’s financial affairs, including the power to force sales of government assets and to revise budgets to line up with the board’s fiscal plan. It would also act as a gatekeeper for debtors seeking to restructure their debts in court. Only the board could decide who is actually a debtor and to file those cases in federal court. The Puerto Rican debt crisis recently showed these disclosure problems, when numerous citizens bought risky bond securities without being told how risky they actually were. This lead to the territory receiving some help, but the new bill does not provide Puerto Rico the ability to use Chapter 9 of the U.S. Bankruptcy Code, something for which the island officials had been hoping.

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