Securities Arbitration

FINRA Revises Brokerage Firm’s Supervisory Rules

April 7, 2014 | Silver Law Group

FINRA rules establish the core supervisory system procedures which all broker-dealers must follow to protect investors. A broker-dealer or other FINRA member may be sanctioned by FINRA for violating these rules and an investor may bring a FINRA arbitration claim against a brokerage firm for failing to properly supervise a financial advisor or for failing to have in place a reasonable supervisory system in compliance with these rules. Although the systems may be different from one brokerage firm to another, the FINRA code establishes the minimum systems which must be addressed. FINRA Rule 3110 has been revised to address supervision requirements by all FINRA members. These rules codify rules addressing written supervisory procedures, designation of supervisory principals and customer complaints. The rule was published in FINRA Notice to Members 14-10 and can be viewed on FINRA’s website.

SEC Investor Bulletin Educates Investors About Impact of Fees on Portfolio Values

March 24, 2014 | Silver Law Group

The Securities Exchange Commission (SEC), Investor Bulletin on fees and expenses reminds investors about the effect fees on investment accounts can have on a portfolio over the long run. According to the SEC Investor Bulletin, “These fees may seem small, but over time they can have a major impact on your investment portfolio.” The SEC’s Office of Investor Education illustrates the effects through the use of a graph. In the hypothetical example, a $100,000 portfolio is assumed to grow 4% annually with annual fees of 0.25%, 0.50% and 1.00% that are deducted over a 20-year period. The differences between the account values at the end of period show a $30,000 disparity in portfolio values between the portfolios with 1.00% and 0.25% in annual fees deducted from the respective portfolios. This simplistic example should make investors wary about the fees they are paying, whether disclosed or not, these fees can greatly diminish any retirement nest egg.

The SEC Investor Bulletin urges investors to “get informed” by reviewing account statements, confirmations and investment prospectuses to become better informed. The bulletin also provides helpful questions investors should ask their financial advisors before investing:

What are all the fees relating to this account?

Merrill Lynch Hedge Fund Investors Offered Opportunity To Exit The Endowment Fund With Substantial Losses

March 7, 2014 | Silver Law Group

According to recent SEC filings, the Endowment Master Fund LP, has offered investors an exit strategy from the hedge fund offering a new fund through a Private Placement Memorandum (PPM) which will be used to liquidate the Fund. The Endowment Master Fund, LP was marketed heavily by Wall Street firms, including Merrill Lynch. The PPM describes the Offer as a like-kind exchange of investors’ pro-rata interest of the portfolio holdings into a new PMF Fund, LP. According to the SEC filings, dated February 20, 2014, “the PMF Fund, LP and the Endowment Master Fund, LP will be managed differently, with the PMF Fund, LP managed for purposes of orderly liquidation.”

For investors, the Offer provides little certainty because investors must choose whether to liquidate now without knowing the true value of the Fund which will be determined at a later date. `The Offer for the like-kind exchange expires March 19, 2014 which requires more than a leap of faith for investors in a hedge fund that has languished far behind the market returns. Investors must make an investment decision without knowledge of the value exchanged and how much will be realized during the liquidation period. According to the New York Times article, After Weak Returns, the Endowment Fund Limits Withdrawals, the hedge fund, “began to struggle in 2011, suffering losses of about 4.1 percent, after fees, compared with a gain of 2.5 percent by the S&P 500.”

On February 24, 2014, a Thomson Reuters article underscores the effects of the substantial hedge fund costs on the Funds dismal performance, “Even for investors who stay with the fund, there will be high costs. They will not be permitted to ask for any money back this year. They will also be charged a 1 percent management fee and a 1 percent servicing fee. On top of that there will be the fund’s underlying managers’ 1.3 percent management fee and a 16 percent of profits as an incentive fee.” The article points to the hedge fund underperformance in 2013, “with the fund earning only 2.08 percent last year, dramatically trailing the Standard & Poor’s 32 percent gain.” For Merrill Lynch customer’s, “If investors accessed the Endowment Fund through Merrill Lynch they will have paid as much as a 2.5 percent upfront charge.”

What Solutions Exist for Puerto Rico Investors in Puerto Rico Municipal Bonds After Credit Rating Downgrades For General Obligation Bonds to Junk Status?

February 10, 2014 | Silver Law Group

The Standard & Poor’s and Moody’s credit ratings agencies downgraded Puerto Rico’s general obligation bonds to BB+ and Ba2, respectively, which is below the investment grade status given to most U.S. municipal bonds. The downgrade had been prognosticated by many brokerage firm research analysts, including UBS Financial Services (UBS) over the last several weeks. UBS Financial Services’ recent report Municipal Brief: Puerto Rico Credit & Market Update dated January 29, 2104, predicted downgrade and additional problems for Puerto Rico Municipal Bond Investors. The reported sentiments of UBS Wealth Management research analysts Thomas McLoughlin and Kristin Stephens are clear, “The probability of a downgrade of the Commonwealth’s GO and related bond ratings by all three ratings agencies into the non-investment grade category by the end of the fiscal year (30 June 2014) is high. Given the myriad obstacles facing Puerto Rico, we believe that at least one rating agency will take such an action within the next 30 days.” UBS research opinions were also consistent with recent moves by S&P Dow Jones Indices which oversees the methodology used for constructing the S&P National Municipal Bond Indices that are used by investors to track the performance of municipal bonds issued throughout the U.S.

On December 20, 2013, S&P Dow Jones Indices announced the removal of U.S. territories, including Puerto Rico, from the S&P Municipal Bond “investment grade indices.” According to S&P Dow Indices, the removal of Puerto Rico municipal bonds as a component from the U.S. National Municipal Bond Market indices was due to dissimilarities between the “performance and characteristics” between the U.S. territories, including Puerto Rico, and the universe of “investment grade” municipal bonds issued by states and municipalities throughout the country. These changes were originally to be made on a gradual basis through March 2014. On January 8, 2014, S&P Dow Jones Indices hastened the removal of U.S. territories, including Puerto Rico municipal bonds, from S&P National AMT-Free and S&P AMT-Free Municipal Series Indices which was now effective January 2014 month end.

The removal of Puerto Rico municipal bonds from the universe of “investment grade” municipal bonds could potentially result in increased sell orders from municipal bond portfolio managers driving prices lower. Selling pressure from municipal bond portfolios including large mutual funds that hold Puerto Rico municipal bonds could be required because of fund-imposed “investment grade” mandates or money manager negative sentiment about the Puerto Rican economy. UBS Puerto Rico Family of Funds, including UBS Puerto Rico Fixed Income Funds and UBS Puerto Rico Investors Tax Free Funds, that are leveraged 50% against an underlying portfolio of Puerto Rico municipal bonds which may soon face lower prices. The effects of leverage on further price declines could be disastrous for closed-end funds that are illiquid and non-traded.

Pending Credit Ratings Downgrades on Puerto Rico Municipal Bonds Weigh Heavily On Leveraged UBS Closed-End Bond Funds

January 14, 2014 | Silver Law Group

UBS Financial Services of Puerto (UBS )recently reported the net asset values (NAV) for their proprietary closed-end funds mat suffer future losses. These funds are a part of the UBS Puerto Rico Family of Funds which are marketed exclusively to Puerto Rico residents. The UBS Puerto Rico Fixed Income Funds and UBS Puerto Rico Investors Tax Free Funds, are leveraged 50% and concentrated in Puerto Rico issuers, continue to suffer losses with many Puerto Rico issuer credit ratings coming under review for potential downgrades. As of January 2, 2014, UBS reported the UBS Puerto Rico Fixed Income Funds and UBS Puerto Rico Investors Tax Free Funds have declined on average another 7.15% and 4.16%, over the last 22 days.

According to UBS Financial Services, Puerto Rico Municipal Bonds are currently under review for a downgrade in credit quality by Moody’s Rating Agency. The Moody’s Global Credit Research report dated December 11, 2013 stated that approximately $52 Billion in debt financing is affected by the downgrade review. During the review period, Moody’s reports the downgrade review will focus on the following:

The ability to access the debt market for more public finance;