October 9, 2013 Comments (0) Blog, Securities Fraud

Risks of Closed-End Funds Coming to Fruition?

(Last Updated On: July 17, 2015)

With rates rising, some closed-end funds (particularly the highly leveraged ones) are starting to show some significant losses.  The White Law Group is investigating the liability that brokerage firms may have for unsuitably recommending certain closed-end funds.

Fixed-income investors are often attracted to closed-end funds because many of the funds are designed to provide a steady stream of income, usually on a monthly or quarterly basis as opposed to the biannual payments provided by individual bonds.

Unlike mutual funds, closed-end mutual funds issue all of their shares on the first day they go public (instead of issuing and redeeming new shares everyday at their NAV). After that, the fund’s market value can move just like an individual stock, free to rise and fall above and below the actual cash value of the shares.  And while these shares can trade at a premium to their actual cash value or NAV, they usually trade at a discount (ranging from 2-3% on the low end, to 15-25% on the high end).

Closed-end funds will commonly employ leverage to enhance their yields. With this extra leverage comes additional risk.  It is this risk that makes closed-end funds unsuitable for conservative investors.

There are certain other features of closed-end funds that are distinct and make the investments potentially unsuitable for conservative and/or retired investors, including that:

–          Once a closed-end fund’s IPO is complete, fund shares are bought and sold primarily in the secondary market;

–          Closed-end funds pay a high sales load, often as high as 4.75%, on the initial offering;

–          The market price of a closed-end fund’s shares may trade at, below or above NAV (Net Asset Value).

–          Your Financial Advisor may also earn additional compensation in connection with secondary market transactions you make, sometimes as high as 3.5% of your purchase (a “mark up”), and up to 1.5% on a sale (a “mark down”).

Some funds to monitor as rates rise are the following:

Central GoldTrust Common
Aberdeen Indonesia Fund Inc Common
BlackRock NY Municipal Bond Common
Morgan Stanley India Investment Common
Eaton Vance MA Municipal Bond Common
Nuveen VA Premium Income Muni Common
Morgan Stanley Latin American Discovery Fund Common
BlackRock PA Strategic Muni Common
BlackRock Muniyield Inv Qty Common
Blackrock Muni Inc Inv Qty Tr Common
Eaton Vance MI Municipal Income Common
Nuveen Quality Income Muni Common
UBS Global High Income Fund Inc. Common
BlackRock Municipal Income Inv Common
Morgan Stanley Emerging Markets Debt Common
BlackRock NY Municipal Inc II Common
BlackRock NY Muni Inc Qty Common
Delaware Invest National Muni Common
Aberdeen Latin America Equity Common
Invesco PA Value Muni Common
BlackRock MuniYield MI Qty II Common
Nuveen Diversified Currency Opp Common
BlackRock MuniYield MI Quality Common
Nuveen CA Div Adv Muni 3 Common
Morgan Stanley Emerging Markets Domestic Common
Aberdeen Asia-Pacific Income Common
Eaton Vance OH Municipal Income Common
Eaton Vance MI Municipal Bond Common
US Bank American Strategic Income II Common
Nuveen Select Quality Muni Common
Nuveen Municipal Advantage Common
Nuveen Global Income Opp Common

UBS Puerto Rico Fixed Income Fund I, Inc.

UBS Puerto Rico Fixed Income Fund II, Inc.

UBS Puerto Rico Fixed Income Fund III, Inc.

UBS Puerto Rico Fixed Income Fund IV, Inc.

UBS Puerto Rico Fixed Income Fund V, Inc.

UBS Puerto Rico Fixed Income Fund VI, Inc.

UBS Puerto Rico Investors Tax-Free Fund, Inc.

UBS Puerto Rico Investors Tax-Free Fund II, Inc.

UBS Puerto Rico Investors Tax-Free Fund III, Inc.

UBS Puerto Rico Investors Tax-Free Fund IV, Inc.

UBS Puerto Rico Investors Tax-Free Fund V, Inc.

UBS Puerto Rico Investors Tax-Free Fund VI, Inc.

UBS Puerto Rico AAA Portfolio Bond Fund, Inc.

UBS Puerto Rico AAA Portfolio Bond Fund II, Inc.

UBS Puerto Rico AAA Portfolio Target Maturity Fund, Inc.

UBS Puerto Rico Tax-Free Target Maturity Fund I, Inc.

UBS Puerto Rico Tax-Free Target Maturity Fund II, Inc.

UBS Tax Free Puerto Rico Fund, Inc.

UBS Tax Free Puerto Rico Fund II, Inc.

UBS Tax Free Puerto Rico Target Maturity Fund, Inc.

UBS Puerto Rico Mortgage-Backed & Government Securities Fund, Inc.

UBS Puerto Rico GNMA & US Government, Inc.

 

Some of these funds are already trading at a steep discount to their NAV.  Others may be highly leveraged, exposing them to interest rate risk.

Brokerage firms and financial advisers have an obligation to insure that an investment is appropriate in light of the investor’s age, net worth, income, investment experience, and investment objectives. If a broker or brokerage firm makes an unsuitable recommendation, investors may have an actionable claim to recover their investment losses through a FINRA arbitration.

If you suffered losses in a closed-end fund and would like to speak to a securities attorney about whether you have a potential FINRA dispute resolution claim, please call The White Law Group’s Chicago office at 312/238-9650 for a free consultation.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

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