Articles Tagged with Puerto Rican Municipal Bonds

On Monday, April 14, 2014, the Financial Industry Regulatory Authority (FINRA) announced that it would lift the hold that it had put on some cases related to the collapse of Puerto Rico Bond Funds.

FINRA has been able to expand its pool of arbitrators that will be available to hear the cases. There are approximately 700 eligible arbitrators on its roster who have agreed to serve in Puerto Rico, where the majority of the 209 cases received to this point, are to be heard.

Last summer, investor fears began to rise when Detroit filed for bankruptcy. Investors, seeing a city go bankrupt, became concerned with Puerto Rico’s $70 billion in municipal debt. As fear set in, investors in the UBS Puerto Rico family of closed-end municipal bond funds began to lose billions. Nineteen of these funds lost $1.66 billion during the first nine months of 2013.

On March 21, 2014, The Financial Industry Regulatory Authority (FINRA) announced that it is investigating trading in Puerto Rico, examining secondary trades in Puerto Rico’s blockbuster $3.5 billion bond deal. FINRA is looking at possible violations of rules requiring minimum sales of $100,000. The greatest concern is that the bonds are being sold to individual investors in violation of securities regulations and FINRA Rules, including FINRA Rule 2111, which requires that a trade be suitable for particular investors. Given the prospectus’ apparent intent to make these institution-only bonds, sales to individual investors would be highly improper.

The self-governed United States territory sold the debt on March 11, 2013, in the largest high-yield offering for the municipal market. The issue provided Puerto Rico with enough cash to pay its bills through June 2015, as the island attempts to prop its budget, giving officials more time to jump-start the economy.

The FINRA investigation comes amid concerns that the new bonds—which now carry junk status after Puerto Rico was cut to junk last month—are being improperly sold to individual investors. The bonds’ prospectus provides that the debt will be issued in denominations of $100,000, absent an upgrade in Puerto Rico’s credit rating. Industry professionals have noted that making the trade size contingent on credit ratings is unusual, and suggests that the writer of the documents intentionally meant to prevent trades to small investors. However, recent trading activity has shown trades in denominations of as little as $5,000—smaller size trades that are more typical of individual investors.

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