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SEC Launches Inquiry into Mutual Funds to Determine If UBS Puerto Rico Bond Purchase Risks Were Properly Disclosed

Posted: Nov 06, 2013 | Posted in:

Amid rising concerns about Puerto Rico defaulting on its debt, the Securities and Exchange Commission (SEC) has launched an investigation into mutual fund companies that invested millions of dollars in UBS Puerto Rico funds. UBS is a global firm providing financial services in more than 50 countries. UBS packaged and sold the Puerto Rican securities to investors and local clients in closed end funds.

The SEC will be making inquiries into several major mutual fund companies, including UBS, in order to determine if the fund managers alerted investors of the potential risks associated with the investments in the Puerto Rican debt.

The outcome of the investigation could have a major impact on investors who trusted their mutual fund advisors’ advice to invest in the bond funds and face significant financial loss as a result of the collapse of the Puerto Rican bond market.

Were Investors Warned of the Risks?

Municipal bond funds are widely viewed by investors as a safe, low-risk investment. When investors purchase a mutual fund with the understanding that the fund has made significant investments in bond funds, they may assume that the risk of default is minimal.

The reality, however, is that $70 billion in Puerto Rico bonds have been issued and serious concerns have arisen regarding whether Puerto Rico will default on its obligations.  Ten billion dollars of Puerto Rico’s debt was sold by UBS.

If Puerto Rico defaults, the bonds—which have already been downgraded—will suffer a further downgrade to junk bond status.  Investors in mutual funds will experience a significant decline in the value of their investments—a decline that they may not have been expecting if their mutual fund managers did not properly disclose the potential risks associated with the purchase of UBS Puerto Rico bonds.

The SEC protects investors and one of the mandates under federal securities law is that mutual fund managers must disclose the risk level of investments to potential clients so that the client can make informed choices.  The SEC, however, believes certain mutual funds failed to provide sufficient information about the degree of risk and the potential for loss.

SEC Investigation

The SEC will launch a nationwide investigation limited in scope to mutual funds that invested in certain Puerto Rican securities.  Mutual funds under investigation include OppenheimerFunds and Franklin Templeton Investments.  If the SEC finds wrongdoing, this could be good news for investors as the outcome of the investigation could make it easier for spurned investors to take legal action to recover their losses.

Investors in the Franklin Double Tax-Free Income A Fund have lost 15.23 percent since July, and as of October 23, the fund was down 12.74 percent year-to-date.  The Oppenheimer Rochester VA Municipal A Fund is also down 14.60 percent since June and 13.05 percent year-to-date.

Investors, many of whom are saving for retirement, are largely dependent upon the money they receive from their bond funds to provide a secure retirement.  These investors do not deserve to be misled and if mutual fund companies failed to disclose the risk, then they should be held accountable for their actions.