Category Archives: Highmark

Puerto Rico Bonds Subject of Regulatory Investigation

by Robert H. Rex, Esq. 

On October 9th, 2013, Massachusetts Securities Regulator William F. Galvin announced that inquiry letters have been sent to Fidelity’s FMR Co., Inc.; Oppenheimer Funds (a unit of Massachusetts Mutual Life Insurance Co.; and UBS Financial Services in connection with the sale of Puerto Rican municipal debt. 

The release makes the following points: 
  • Puerto Rico is currently on the verge of insolvency and many of its obligations are at or near junk rating, thus the risks associated with its municipal debt obligation are disproportionally high. 
  • Puerto Rican municipal debt obligations have been popular with retail investors because they have historically been accompanied by high yield and are exempt from all taxes – local, state and federal.
  • Because of the advantageous yields and tax benefits many Massachusetts municipal bond funds have a high concentration of Puerto Rican debt.

Puerto Rico’s Financial Crisis

The economy in Puerto Rico began a recession in 2006 and forecasts for 2014 are not optimistic. This shrinking economy has severley weakened the municipal bond market. Puerto Rico’s debt is over $70 billion, there is unemployment of over 7% and the population of the island has been shrinking for more than 10 years. 

During August/September 2013 Puerto Rico’s bonds have lost 40% or so of their value and now have yields on a par with Greece. Rating agencies have lowered ratings on Puerto Rican debt to a level just above Junk Bond status. 

Morningstar reports that most (77%) mutual funds hold Puerto Rico bonds. In addition to the companies being investigated by Massachusetts other companies such as Eaton Vance, Franklin Templeton, Highmark, Nuveen, Wells Fargo, Western Asset and others sold mutual funds containing these troubled investments. 

Investors would be wise to check their portfolios to see if any of your mutual funds contain Puerto Rican municipal debt. 

For a listing of some of the UBS Puerto Rico bond funds, see this. 

For a listing of the 20 funds with the greatest exposure to Puerto Rican bonds, see this. 

Investors suffering losses on Puerto Rico municipal bonds, whether purchased directly or contained in a mutual fund you own,  may be able to recover damages. 

Call us for a no charge consultation with an experienced securities attorney. 

Rex Securities Law

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