FINRA Sanctions Oriental Financial Over Concentrated Customer Accounts in Puerto Rico Bond Funds

shutterstock_26269225This is the second regulatory action that our firm has tracked concerning brokerage firms recommending concentrated positions in Puerto Rico bond funds without having appropriate supervisory system and procedures designed to identify and review concentrated securities purchases in Puerto Rico closed-end funds.

As we reported, The Financial Industry Regulatory Authority (FINRA) sanctioned Popular Securities, Inc. (Popular Securities) alleging between July 1, 2011, and June 30, 2013, Popular failed to establish and enforce a supervisory system and procedures designed to identify and review concentrated securities purchases in Puerto Rico municipal bonds and Puerto Rico closed-end funds. Now in a similar action, FINRA alleged that between July 1, 2011, and June 30, 2013, Oriental Financial Services Corp. (Oriental) failed to establish, maintain, and enforce, supervisory systems and procedures to identify and review concentrated securities purchases in Puerto Rico municipal bonds and Puerto Rico closed-end bond funds.

Oriental has been a F]NRA member since 1993 and is a subsidiary of OFG Bancorp. Oriental operates out of headquarters in San Juan, Puerto Rico and engages in a general securities business that focuses on Puerto Rico municipal securities and open and closed-end mutual funds. Oriental has 50 brokers located in 12 branch offices.

Puerto Rico Bond Funds were sold as providing Puerto Rico residents with various tax benefits including exemption from US. estate and gift taxes. In addition, the Puerto Rico Bond Funds offered a triple tax benefit to investors. However, in December 2012, Puerto Rico general obligation and related bonds ratings were downgraded. Then, six months later in June 2013, the Puerto Rico Power Authority (PREPA) revenue bonds ratings were also downgraded.

FINRA found that Oriental customers purchased concentrated positions of in Puerto Rican municipal bonds and bond fund securities. FINRA alleged that between July 1, 2011, and June 30, 2013, Oriental solicited concentrated investments in Puerto Rico related securities. In May 2012, FINRA alleged that Oriental warned its brokers that a credit rating downgrade could negatively impact the securities. Nonetheless, FINRA found that the brokers at Oriental continued to solicit concentrated purchases in Puerto Rico related securities even after the downgrade risk warning. Thereafter, in December 2012 two credit rating agency’s downgraded Puerto Rican related debt.

FINRA found that while Oriental’s written supervisory procedures required broker to have reasonable grounds to believe that a recommendation was suitable for the client, the procedures did not outline the steps that the firm should take to review transactions for concentration. Accordingly, FINRA found that Oriental did not enforce systems or procedures that required supervisors to review customer accounts for concentrated purchases in a single security or substantially similar securities, or securities of a single geographic region, including the Puerto Rico municipal bonds of bond fund securities.

FINRA’s findings with regard to Oriental echo the allegations made by hundreds of investors against firms such as Oriental, Popular Securities, and UBS Financial Services, Inc. (UBS). Our firm represents investors in actions against these firms. In the case of UBS, investors have claimed that the firm concentrated investments in the UBS Puerto Rico Bond Funds and other Puerto Rico municipal bond debt. Our clients have come forward to our firm to tell very similar stories about how their financial advisors recommended nearly 100% of their portfolios to be invested in the UBS Puerto Rico closed-end funds, some through additional margin or bank loans. Due to the depressed economic activity and rising debt levels in Puerto Rico investors have lost billions.

The 23 funds include the Tax-Free Puerto Rico Fund I-II; Tax-Free Puerto Rico Target Maturity Fund; Puerto Rico AAA Portfolio Target Maturity Fund; Puerto Rico AAA Portfolio Bond Fund I-II; Puerto Rico GNMA & U.S. Government Target Maturity Fund; Puerto Rico Mortgage-Backed & U.S. Government Securities Fund; Puerto Rico Fixed Income Fund I-VI; Puerto Rico Investors Tax-Free Fund I-VI; Puerto Rico Tax-Free Target Maturity Fund I-II; and the Puerto Rico Investors Bond Fund.

Investors who have suffered investment losses may be able recover their losses through arbitration. The attorneys at Gana LLP are experienced in representing investors in the mishandling of their accounts. Our consultations are free of charge and the firm is only compensated if you recover.