Galvin begins examination of 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 on Wednesday announcing it had sent inquiry letter 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 municipal bonds declined in September 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 municipal bonds or bond funds using margin accounts. As the values the bonds decreased, brokerage firms made margin calls, forcing investors to sell more bonds or municipal bond funds. Over the past ten years, UBS has sold $10 billion in proprietary Puerto Rico municipal bond funds, which are heavily weighted to Puerto Rican securities and are also 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. “Everybody has this stuff in their portfolio. The huge tsunami of margin calls pushed the prices down on these bonds. Are we close to the bottom? 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' exposures 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 the local securities, which are exempt from local, state and federal taxes. Because of the advantageous yields and tax benefits, many Massachusetts state-specific municipal bond funds have a high concentration of Puerto Rican debt, according to Mr. Galvin's statement. Representatives of Fidelity, OppenheimerFunds and UBS were not available to comment on Wednesday.