The White Law Group continues to investigate the liability that brokerage firms may have for recommending UBS’s Family of Puerto Rico funds. As has been widely reported, many of these funds have suffered catastrophic losses.
Brokerage firms have a responsibility to their clients to only recommend investments that are appropriate for them in light of their age, income, net worth, investment objectives, and investment experience. Based on what is now known about the UBS Puerto Rico Funds, it appears that many of the brokers and financial advisors that recommended these investments did so inappropriately.
The following information may be helpful to investors in these funds and has been taken from UBS’s own marketing materials.
The Puerto Rico mutual fund (“Puerto Rico Funds”) market differs from the United States fund market in various ways, including local tax implications and fund regulations. According to UBS, qualifying Puerto Rico investors can benefit from investing in securities issued by Puerto Rico Funds because they are exempt from Puerto Rico and United States estate and gift taxes and may provide tax-exempt or tax-advantaged income, depending on the type of fund and its investment specifications.
The Puerto Rico Funds are registered under the Puerto Rico Investment Companies Act and are regulated by the Office of the Commissioner of Financial Institutions of Puerto Rico. They are not registered as investment companies with the United States Securities and Exchange Commission (“SEC”) and the shares that they offer to investors are also not registered with the SEC.
The objective of these funds is to provide investors with current income consistent with the preservation of capital. However, in order to enjoy the tax benefits that make them especially attractive to Puerto Rico investors, the funds must normally meet a variety of criteria, including the fact that at least 67% of each fund’s total assets are normally invested in taxable and tax-exempt securities issued by Puerto Rico issuers.
Many of the UBS Family of Puerto Rico Funds are closed-end funds. A closed-end fund issues a fixed number of shares to raise capital, similar to selling stock in initial public offerings (IPOs). After the initial offering, however, the shares of the USB Puerto Rico closed-end funds (Funds) are traded in a secondary market between investors. The Funds are not listed on an exchange. Instead, UBS facilitates secondary market transactions for clients who wish to buy or sell the UBS Puerto Rico Fund shares. According to its market materials, UBS has done this by maintaining a trading desk that quotes a “bid” and “offer” price for each of the Funds, and executing transactions for customers of the Firm who want to trade. The prices quoted by the trading desk apparently represent UBS’s judgment of the market price for shares of each Fund.
UBS is the dominant, and may be the sole, source of secondary market liquidity in the UBS Puerto Rico Fund shares. As such, there may be no other source of price information for Fund shares or other purchaser of Fund shares.
The closed-end cunds currently managed by UBS Asset Managers of Puerto Rico are:
– Tax-Free Puerto Rico Fund, Inc.
– Tax-Free Puerto Rico Fund II, Inc.
– Tax-Free Puerto Rico Target Maturity Fund, Inc.4
– Puerto Rico AAA Portfolio Target Maturity Fund, Inc.
– Puerto Rico AAA Portfolio Bond Fund, Inc.
– Puerto Rico AAA Portfolio Bond Fund II, Inc.
– Puerto Rico GNMA & U.S. Government Target Maturity Fund, Inc.
– Puerto Rico Mortgage-Backed & U.S. Government Securities Fund, Inc.
– Puerto Rico Fixed Income Fund, Inc.
– Puerto Rico Fixed Income Fund II, Inc.
– Puerto Rico Fixed Income Fund III, Inc.
– Puerto Rico Fixed Income Fund IV, Inc.
– Puerto Rico Fixed Income Fund V, Inc.
– Puerto Rico Fixed Income Fund VI, Inc.
Risks applicable to all Puerto Rico Funds (as disclosed in UBS’s marketing materials):
– Shares of the funds are not bank deposits and are not guaranteed or insured by any bank, government entity or the Federal Deposit Insurance Corporation. An investment in the funds is not guaranteed and you may lose money if you invest in the funds.
– Yields on the funds will fluctuate.
– The share price of the funds will fluctuate.
– There is no guarantee that a fund will be able to achieve its investment objectives.
– The funds may be required to invest at least 67% of their portfolio in Puerto Rico securities. As such, the funds are more sensitive to economic, political, regulatory or other factors adversely affecting Puerto Rico issuers than a fund that is not concentrated in Puerto Rico issuers.
– The funds engage in transactions, such as securities purchase and sales transactions and repurchase agreement transactions, directly with UBS Puerto Rico and possibly other affiliates.
– A relatively high percentage of the funds’ total assets may be invested in the obligations of a limited number of Puerto Rico issuers, so that the conditions in the Puerto Rico market may result in a greater increase or decrease in the funds’ net asset value than that of more diversified funds.
– The funds will be impacted by the risks associated with the funds’ underlying investments; if one of the fund’s investment sectors suffers a loss in value, this will most likely affect the overall value of the fund.
– The risks discussed herein may be magnified for investors choosing to concentrate their portfolios in the funds.
Additional risks applicable to UBS’s Puerto Rico closed-end funds
– The funds may use leverage or borrow money to make investments in securities. Using leverage may reduce the dividend the funds pay or reduce the value of your fund investment.
– The market price of fund shares is based on relative demand and supply of the shares as well as other factors, including the general market and economic conditions discussed in the Prospectus. Accordingly, the value of your investment in the funds will fluctuate and the price that you are able to obtain for your fund shares may be less than the net asset value of the shares and may be less than the price that you paid in purchasing fund shares.
– While UBS Puerto Rico currently intends to maintain a market in fund shares, it is under no obligation to do so. Therefore, there may be occasions when you will be unable to sell your shares or will be able to sell at a loss or at times at a significant loss.
If you invested in a UBS Puerto Rico closed-end fund and would like to discuss your litigation options, please call the securities attorneys of The White Law Group at 561-807-6804 for a free consultation. The White Law Group is a national securities fraud, securities arbitration, investor protection, and securities regulation law firm with offices in Boca Raton, Florida and Chicago, Illinois.
For more information on the firm’s investigation in to UBS’s Family of Puerto Rico closed-end funds, visit https://www.whitesecuritieslaw.com/2013/10/10/puerto-rico-municipal-bond-crisis-worsens/ and https://www.whitesecuritieslaw.com/2013/10/09/current-value-of-ubs-puerto-rico-fund-investments/.