Unsuitable Investment Advice

Bond Buyer Magazine Highlights Silver Law Group’s FINRA Arbitration Claims Against UBS For Puerto Rico Investors

February 13, 2014 | Silver Law Group

UBS Financial Services of Puerto Rico has come under the scrutiny of a leading bond market commentator, The Bond Buyer in yesterday’s article titled, UBS Puerto Rico Faces Surge in Arbitration Claims. Standard & Poor’s, Moody’s and Fitch’s credit ratings agencies downgraded Puerto Rico’s general obligation bonds to junk bond status, which is below the investment grade status given to most U.S. municipal bonds. The downgrade was predicted by UBS Financial Services’ (UBS) recent report Municipal Brief: Puerto Rico Credit & Market Update dated January 29, 2104. This prediction came long after UBS Financial Services of Puerto Rico branch offices mobilized its sales force with a targeted marketing campaign to sell the UBS Puerto Rico Family of Funds to investors. A market revelation that is too late for those Puerto Rico investors’ whose portfolios are now heavily laden with UBS’ proprietary closed-end funds geographically concentrated in Puerto Rico bonds.

As mentioned in our previous blog post, “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.” Further price declines in Puerto Rico municipal bonds has already occurred and the effects for many UBS closed-end funds, including UBS Puerto Rico Fixed Income Funds and UBS Puerto Rico Investors Tax Free Funds, has been an average drop in many of the funds’ net asset values (NAV) of another 5% since the announced credit ratings downgrades.

Scott L. Silver, managing partner of Silver Law Group, has brought clarity to many Puerto Rico investors who have contacted his law firm. These investors have a better understanding of the Financial Industry Regulatory Authority (FINRA) securities arbitration process. The bond buyer reported, “his firm has filed about three dozen claims for FINRA arbitration in the past several weeks.” According to the Bond Buyer interview Mr. Silver pointed out that FINRA “rules require dealers to supervise the activities in customer accounts” and said “his clients’ losses may be attributed to a failure by UBS to supervise their financial advisors.”

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.

Why Are Financial Advisors Clueless About Risks of Leveraged & Inverse ETFs: The Stifel Nicolaus Story

January 17, 2014 | Silver Law Group

The Stifel Nicolaus & Company story about financial advisors’ lack of training and supervision concerning exchange traded funds (ETFs) is not much different than other Wall Street giants, including Morgan Stanley, UBS, Citigroup and Wells Fargo who were fined for similar violations. On December 17, 2013 Stifel Nicolaus & Company agreed to a Letter of Acceptance, Waiver and Consent (AWC) with the Financial Industry Regulatory Authority (FINRA) and fined $1 million for violation of FINRA rules related to the sale of non-traditional ETFs to retail investors. FINRA determined in the AWC violations related to a failure to supervise the unsuitable investment advice provided by its financial advisors to retail investors.

Non-traditional exchange traded funds are investments designed to achieve investment returns that are a multiple (leveraged) of an underlying benchmark or the inverse (negative correlation) to an underlying benchmark. The leveraged or inverse ETFs are designed to track an underlying basket of securities, indexes, currencies or commodities. In order to achieve these investment results derivatives, swaps and futures contracts must be used which makes non-traditional ETFs complex investments rarely understood by the financial advisors who recommend them.

Non-traditional ETFs use derivatives, swaps and futures contracts to accomplish the intended performance objectives and requires a daily reset of the portfolio holdings which results in a tracking error over time. In other words, most non-traditional ETFs are only managed to meet the investment objectives on a daily basis. Due to the tracking errors over time and the effects of leverage, the performance of an ETF can differ greatly from the performance of the underlying basket of securities, indexes, currencies or commodities. According to a FINRA regulatory notice, “While the customer-specific suitability analysis depends on the investor’s particular circumstances, inverse and leveraged ETFs typically are not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.” For buy-and-hold investors, non-traditional exchange traded fund investments have experienced investment results much different from the projections made by their financial advisors.