The value of proprietary closed-end-bond funds heavily invested in Puerto Rican municipal debt and created by a unit of UBS AG is plummeting, leaving the Puerto Rican arm of the firm and its 132 financial advisers there embroiled in a potentially lengthy fight with local investors who purchased the highly leveraged funds and now want their money back.
The UBS Puerto Rico family of funds consists of 14 such closed-end funds, sold exclusively through registered representatives and brokers with UBS Financial Services Inc. of Puerto Rico.
$10 billion sold
According to marketing materials, UBS had sold more than $10 billion of the funds through the end of 2012.
One plaintiff's attorney, Lars Soreide, said he filed a Financial Industry Regulatory Authority Inc. complaint against UBS Financial Services Inc. of Puerto Rico recently on behalf of a 70-year-old retiree whose portfolio of $500,000 was invested entirely in proprietary closed-end funds, along with individual municipal securities contained inside the funds she already owned.
She opened a line of credit with UBS that “she used to buy her home, and is now selling the portfolio to cover the equity line she took out,” Mr. Soreide said. “She relied on the income [from the municipal holdings] to pay for retirement, and UBS has been liquidating the holdings to pay interest on margin loans.”
The firm has put one broker on administrative leave after claims emerged that the adviser encouraged clients to buy securities on a line of credit. The disciplinary action was first reported by the The New York Times last week.
UBS spokesman Gregg Rosenberg confirmed the Times report and said the firm has policies and procedures governing the Puerto Rico funds, including ones regulating sales practices and suitability.
At the end of August, the Puerto Rico Fixed Income Fund Inc. reported a net asset value of $5.46 per share. Less than a month later, on Sept. 25, the fund reported a NAV of $3.74 per share, a decline of 31%.
The fund had an initial public offering price of $10 per share in 2003. Through August, it had a five-year annual total return of close to 5%, compared with a market return of almost 8%, according to the UBS marketing documents.
“General weakness in municipal markets across the U.S. and Puerto Rico, and apprehension about the direction of interest rates, have led to steep declines in Puerto Rico municipal bond and closed-end-fund prices, and a lack of liquidity for these securities,” UBS Americas spokeswoman Karina Byrne said. “UBS has been monitoring this.”
Plaintiff's attorneys who have spoken with UBS clients invested in the funds tell strikingly similar tales about how their assets were allocated. Retirees or near-retirees invested as much as 100% of their portfolios in the funds, along with individual Puerto Rican municipal securities. The firm's pitch relied heavily on both the federal and local tax benefits gained by investors in Puerto Rico, according to attorneys.
“We're seeing very concentrated portfolios. There was a lot of pressure on brokers to sell these products,” said Scott Silver, a plaintiff's attorney. “UBS probably does 80% of its business down there in bond products for retail clients. It's been a dominant player on the island for a long time.”
The impending scrutiny by plaintiff's attorneys comes more than a year after the Securities and Exchange Commission flagged the UBS Puerto Rico unit for sale practices surrounding the municipal securities. In 2008 and 2009, the firm's “former CEO and its head of capital markets made misrepresentations and omissions of material facts to numerous retail customers in Puerto Rico regarding the secondary-market liquidity and pricing of UBS Puerto Rico non-exchange-traded closed-end funds,” according to the firm's profile on the BrokerCheck data base maintained by Finra. It paid $26.6 million in fines and restitution.