Galvin eyeing Puerto Rican muni debt obligations

Massachusetts securities regulators have begun to make inquiries about the sale of Puerto Rican municipal debt obligations to investors in the state, with the office of Secretary of the Commonwealth William Galvin last Wednesday saying that it had sent inquiry letters to Fidelity's FMR Co. Inc.; OppenheimerFunds, a unit of Massachusetts Mutual Life Insurance Co.; and UBS Financial Services Inc. The value of Puerto Rican muni bonds declined last month for two reasons, industry observers and plaintiff's attorneys said. First, Puerto Rico has been facing its own fiscal crisis, with economic stagnation and huge pension obligations. Next, many investors bought the individual muni bonds or bond funds using margin accounts.

HIghly leveraged

As the values of the bonds decreased, brokerage firms made margin calls, forcing investors to sell more bonds or muni bond funds. Over the past 10 years, UBS has sold $10 billion in proprietary Puerto Rico muni bond funds, which are heavily weighted to Puerto Rican securities and also are highly leveraged. “It was the orphans, the widows and the little old ladies,” said Myrna Rivera, chief executive of Consultiva Internacional Inc., a registered investment adviser in San Juan, Puerto Rico. “Everybody has this stuff in their portfolio. The huge tsunami of margin calls pushed the prices down on these bonds,” Ms. Rivera said. “Are we close to the bottom?” she asked. “I have to believe we're 80% done, certainly more than half.” The Massachusetts Securities Division has begun an inquiry to determine the extent of Massachusetts investors' exposure to the risks of Puerto Rican bonds, according to a statement. It also is looking into whether investors were adequately made aware of the risks associated with their investments and whether the bonds were properly priced. Investors in Puerto Rico receive tax benefits from owning commonwealth securities, which are exempt from local, state and federal taxes. Because of the advantageous yields and tax benefits, many Massachusetts state-specific muni bond funds have a high concentration of Puerto Rican debt, according to Mr. Galvin's statement. Fidelity spokesman Adam Banker, OppenheimerFunds spokeswoman Kristen Prestano and UBS spokeswoman Karina Byrne all said that their firms declined to comment.