Securities Arbitration Lawyers BlogUBS Bank Loans Created Unacceptable Risks for Puerto Rico Investors
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:
- Interest Rate Risk;
- Credit Risk;
- Geographic Concentration in Puerto Rico Bonds;
- Industry Concentration Risk;
- Special Leverage Risks; and
- Illiquid Non-traded Securities.
In light of these risk factors, UBS explains in the Prospectus and Offering documents that the funds will “hedge” or protect against many of these risks! After the required disclosures, UBS encouraged its financial advisors to solicit and recommend UBS proprietary closed-end funds to investors throughout Puerto Rico by promoting the objective of preservation of capital without highlighting the toxic risks and the potential for large losses by investing in a leveraged fund. However, this is why the Financial Regulatory Authority sales practice rules and regulations have been established to make sure that UBS supervises its financial advisors to prevent unsuitable investment advice through recommendations and unbalanced presentations that result in an excessive portion of an investor’s net worth to be invested in these closed-end bond funds.
So what if an investor needs to access the invested principal in the illiquid investments with no open market? In most cases, UBS and its financial advisors informed unwary investors about the ability to use the proprietary closed-end funds as collateral for UBS Bank Loans to meet their cash needs. According to a recent Investment News story, Silver Law Group managing partner, Scott Silver was quoted, “We have several cases involving the issue of UBS bank loans….” For a $10 billion portfolio invested in 50% leveraged closed-end funds, UBS Bank Loans created unacceptable risks for Puerto Rico investors.