Securities Arbitration

Silver Law Group Urges FINRA to Lift the Stay of all Puerto Rico Arbitration Claims

March 28, 2014 | Silver Law Group

In February 2014, Bond Buyer magazine featured a story about Silver Law Group’s representation of many Puerto Rico investors in FINRA arbitration claims against UBS of Puerto Rico for losses in leveraged bond funds. The article concluded by highlighting Silver Law Group Managing Partner Scott Silver’s concerns that FINRA was not equipped to handle the large number of claims which could easily be anticipated against UBS for selling this complex alternative investment which lost more than 60 percent of its value last fall.

Last week, FINRA finally took public action to address the issue by recognizing the problem and temporarily halting all claims against UBS Puerto Rico while FINRA creates a protocol to administer the cases. Silver Law Group urges FINRA to quickly address these issues and avoid unnecessary delay.

FINRA and the securities industry force investors to arbitrate all disputes with a broker-dealer through an arbitration clause in the customer agreement. However, FINRA arbitration is promoted as a fast, inexpensive process for deciding disputes. Many investors are now frustrated by a system which cannot administratively manage their claims. Investors have suggested, amongst other solutions:

FINRA Fines LPL Financial Over Alternative Investments

March 26, 2014 | Silver Law Group

LPL Financial, the self-proclaimed “nation’s largest independent broker-dealer” was recently fined $950,000 by securities regulator FINRA for allegedly failing to supervise its brokers that sold alternative investments. In a letter of Acceptance, Waiver and Consent (“AWC”), signed March 24, 2014, LPL Financial (“LPL”) settled FINRA’s charges that it failed to implement an adequate supervisory system for the sale of alternative investments.

FINRA’s complaint focuses on LPL’s failure to have a suitable system in place to identify and determine whether purchases of alternative investments, such as equipment leasing programs, real estate limited partnerships, hedge funds, and managed futures, caused its customers’ accounts to be unsuitably concentrated in these types of investments. The allegations further state that LPL’s three-tiered supervisory system had deficiencies at each tier that allowed its customers to become overconcentrated in alternative investments from January 1, 2008 through July 1, 2012.

Alternative investments are complex, high-commission, investments frequently sold by investment banks as an alternative to investing in the stock market. The Securities and Exchange Commission issued a press release in 2014 to remind financial advisors of the compliance requirements related to the recommendation of alternative investments to investors. Despite this, few retail investors are advised that alternative investments can be illiquid, speculative, and rife with conflicts of interest. Unfortunately for investors, the $950,000 fine will not be paid to the victims. Instead, investors who have been damaged may pursue FINRA arbitration claims to recover damages.

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?

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.

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;

FINRA Investor Alert Warns Against Investing With Borrowed Funds

December 27, 2013 | Silver Law Group

FINRA, the securities industry watchdog, recently updated an Investor Alert for investors who purchase securities with “borrowed funds.” According to the alert, investments made with borrowed funds by investors grew substantially in 2013. Investors are warned that the risk of margin calls is significant and they should better educate themselves about these risks before investing with borrowed funds. Investors must understand investing with borrowed funds and the risks of a margin call, in the event, securities used as collateral decline in value. The risks investors should understand about margin calls include:

the forced sale of securities;
no prior notification required;

Hato Rey, San Juan and Guaynabo Investors in UBS Puerto Rico Bond Funds Should Consider Their Investment Recovery Options

December 20, 2013 | Silver Law Group

UBS Financial Services of Puerto Rico reported, as of December 11, 2013, another large decline in multiple proprietary closed-end bond funds managed by UBS Asset Managers. According to the Prospectus and Offering documents for the UBS proprietary closed end bond funds, UBS Puerto Rico Fixed Income Funds and UBS Puerto Rico Investors Tax Free Funds, UBS Financial Services of Puerto Rico and its financial advisors characterized the bond fund investment objective as current income consistent with the preservation of capital. For many years, UBS Financial Services of Puerto Rico and its financial advisors recommended that Puerto Rican residents maintain concentrated positions in their family of proprietary closed-end bond funds.

To enhance the yield to investors, UBS Asset Managers had the ability to leverage the investments made in the bond mutual fund portfolios up to 50% of the value of the underlying portfolio. The leverage resulted in catastrophic losses in the value of the portfolio concentrated in Puerto Rico issued securities sold exclusively to Puerto Rican residents for tax advantaged income. UBS Asset Managers had an obligation and failed to properly manage the portfolio including effective hedging strategies to protect the fixed income portfolios concentrated in securities issued in Puerto Rico.

UBS Financial Services of Puerto Rico reported the Net Asset Values for the following closed-end funds managed solely by UBS Asset Managers as of December 11, 2013:

UBS Bank Loans Created Unacceptable Risks for Puerto Rico Investors

December 20, 2013 | Silver Law Group

UBS Financial Services of Puerto Rico has received the attention of many market watchers in the media since their UBS Puerto Rico Family of Funds suffered a “meltdown” in value. What did not receive adequate media attention are UBS’ sales practices which through the zeal of its financial advisors has left Puerto Rico residents holding excessive amounts of a failed financial product, and in many instances laden with UBS Bank loans. We have learned firsthand the extent of the destruction experienced by Puerto Rican residents who have been targeted by UBS.

The UBS Puerto Rico Family of Funds, UBS Puerto Rico Fixed Income Funds and UBS Puerto Rico Investors Tax Free Funds, were designed to be sold exclusively to residents of Puerto Rico according to their Offering documents. The investment objective was tax free income consistent with preservation of capital. A closer look at the fine print deep in the Offering document tells investors a more cautious tale.

The Prospectus and Offering documents for the proprietary closed-end funds artfully disclose some of the potential risks deemed required by regulatory laws. The risks include: