Closed-End Funds

Judge Rules Against Ex-UBS Puerto Rico Broker in Closed-End Fund Case

Published on: May 6, 2018 | by Shepherd Smith Edwards & Kantas, LLP

In the U.S. Securities and Exchange Commission’s (SEC) Puerto Rico bond fraud case against ex-UBS Puerto Rico broker Jose Ramirez, a federal judge has found that Ramirez committed fraud and was in violation of securities laws when he directed customers to use lines of credit to purchase Puerto Rico closed-end funds. In 2015, the SEC had filed charges against Ramirez accusing him of misleading customers regarding the Puerto Rico closed-end funds while advising them to use money from UBS Bank USA credit lines to buy UBS Puerto Rico fund shares. Ramirez allegedly made an additional $2.8 million in commissions as a result. The brokerage firm fired Mr. Ramirez in 2014.

According to U.S. District Court Judge Pedro Delgado-Hernandez, who granted the SEC’s motion for summary judgment, the ex-UBS Puerto Rick broker lied to customers and failed to tell them that if their collateral went down in value and reached a certain point, the customers might need to have their accounts liquidated to pay back the loans.

In 2013, following a number of credit downgrades, the Puerto Rico closed-end funds saw a substantial drop in value. By September 2013, more than three dozen of Ramirez’s customers had $37 million in “margin maintenance calls” that required many clients to have their accounts liquidated.

UBS Puerto Rico to Pay $18.5M to Settle FINRA Sanctions Over Supervisory Failures Related to Closed-End Fund Sales

Published on: September 30, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority (FINRA) is fining UBS Financial Services Incorporated of Puerto Rico (UBS PR) $7.5 million for supervisory failures involving its transactions in UBS sponsored Puerto Rican closed-end funds (CEF). The brokerage firm also must pay $11 million in client restitution for losses related to those shares.

According to FINRA, a self-regulatory organization for the brokerage industry, for over four years, UBS PR neglected to monitor the combined concentration and leverage levels in customer accounts to make sure transactions were suitable for the respective profiles and objectives of its customers. FINRA said that considering that the firm’s retail customers typically kept high concentration levels in the country’s assets and frequently used these concentrated accounts as cash loan collateral-and in light of the U.S. territory’s volatile economy-UBS should have put into place a system that could reasonably identify and prevent unsuitable transactions.

Instead, the regulator said, UBS PR persuaded certain customers to establish credit lines that were collateralized by their securities accounts. If the value of the account dropped under the required collateral level, the customer would have to deposit more assets or liquidate securities. A credit line that is collateralized by an account that is very concentrated could significantly increase an investor’s risk of loss. When the market dropped in 2013, and a lot of the CEFs lost value, customers were forced to sustain hefty losses to satisfy the calls they received notifying them that their account’s value was now under the required collateral level.
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SROs at Work: MSRB Prioritizes Fiduciary Duty When Setting Up New Muni Advisor Regime & FINRA Puts Out Closed-End Funds Alert to Investors

Published on: November 13, 2013 | by Shepherd Smith Edwards & Kantas, LLP

MSRB Makes Defining Fiduciary Duty Central to Developing Municipal Advisor Regulatory System

Municipal Securities Rulemaking Board says that in coming up with a regulatory system for municipal advisors it’s number one priority is to get clear about the statutory fiduciary duty that these entities would owe to their local and state government clients. The MSRB’s board of directors has asked staff to create a rule proposal that would give guidance on the fiduciary obligation that municipalities have to municipal entities.

Following the release of the fiduciary duty proposal for comments, there also will be proposals about rules addressing possible pay-to-play activities in the industry, municipal advisory firms’ supervisory requirements, limits on gratuities and gifts to those who work for municipal securities issuers and other participants in the market, and solicitor duties. Along with the proposals, the MSRB plans to create a professional qualifications program geared for municipal advisors and perform outreach and education initiatives.