The SEC has issued a Wells notice to UBS regarding secondary market trading of closed-end funds sold in Puerto Rico in 2008 and 2009.
UBS, a former financial adviser to Puerto Rico’s Employees Retirement System that provides pensions for government workers, led the 2008 sale of $2.9 billion in bonds. The sale resulted in $27 million in fees for UBS and its co-underwriters. A UBS manager bought $1.5 billion of the securities and put them into 20 mutual funds. The bonds represented about 17 percent of the funds’ $8.9 billion in assets at the time.
The Puerto Rican Employees fund had assets of $1.9 billion and liabilities of $18.9 billion as of June 2009, leaving it 90 percent underfunded.
Mutual fund shareholders sued UBS in February 2010, saying the firm breached its fiduciary duty to investors by reaping fees on the bond offering while charging fund fees including a 4.75 percent commission.
The $368 million Puerto Rico Fixed Income Fund produced an annual return of 5.4 percent to investors in five years. The $411 million Puerto Rico Fixed Income Fund II averaged 5.6 percent returns in the same period.
Funds established in Puerto Rico and sold only to residents need not register with the SEC. The funds are also exempt from the Investment Company Act of 1940.
Independent sources opine that the sale of the closed-end funds by UBS was riddled with conflicts of interest and insufficient disclosures to clients.