As a result of problems with Puerto Rico bond funds sold by UBS in recent years, the U.S. Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) hit the brokerage firm with fines totaling $33.5 million last week.
In recent years, UBS sold Puerto Rico bond funds as safe and secure investments, often targeting elderly individuals and others who rely on municipal bond funds for retirement. However, following substantial drops in value of the bond funds as Puerto Rico fell into economic crisis, UBS has faced claims over the losses.
In a statement issued by the SEC on September 29, it was announced that UBS was fined $15 million in disgorgement and penalties, with interest.
The SEC charges against UBS Financial Services Inc. of Puerto Rico included charges against a former branch officer, Ramiro L. Colon III, who agreed to pay a $25,000 fine and be suspended from taking a supervisory position for one year.
The SEC also charged Jose Ramirez, Jt., who was a former representative at the company’s Guaynabo branch office, with profiting $2.8 million by having some customers buy Puerto Rico closed-end mutual funds via the proceeds from a line of credit after laundering the money through an outside bank. When the bonds dropped in value, those customers had to pay down a portion of the loans they used to buy the bonds to prevent having their investments liquidated, according to the SEC.
In a separate statement issued by FINRA, which is an independent agency established to oversee the securities industry, UBS was hit with an additional $18.5 million in fines, including $7.5 million for supervisory failures in handling transactions of the Puerto Rican closed-end fund shares, and $11 million in restitution that will be paid to 165 customers who suffered losses with UBS Puerto Rico bond funds.
UBS Puerto Rico Bond Fund Problems
Estimates suggest that UBS Puerto Rico municipal bond investors suffered losses of at least $1.66 billion during the first three quarters of 2013, and that was before they were downgraded to “junk” status in February 2014. The downgrade came after the island territory failed to address fiscal problems that include $70 billion in debt.
“UBS of Puerto Rico operated in a unique economy and ultimately failed to tailor its supervisory systems to its specific business needs,” said Brad Bennett, FINRA’s Executive Vice President of Enforcement. “Despite the fact the firm was very familiar with the unusual characteristics of its retail accounts, it did not supervise these transactions properly to prevent customers’ heightened exposure to risk.”
“Broker-dealers like UBS Puerto Rico must have effective procedures in place designed to detect misconduct by employees under their supervision,” SEC’s director of enforcement, Andrew Ceresney, said in the SEC press release. “UBSPR lacked reasonable systems for ensuring compliance with the firm’s prohibition on loan recycling and to ensure that brokers adequately conveyed the risks involved in lines of credit.”
In addition to enforcement actions brought by the SEC and FINRA, there have also been UBS class action lawsuits filed over the Puerto Rico bond funds, and hundreds of individual arbitration claims have been filed by investors through FINRA.