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SEC probe targets local UBS subsidiary over ’08 mutual bonds sale

UBS Financial Services Inc. of Puerto Rico is facing a possible lawsuit by the U.S. Securities and Exchange Commission, which recently issued a Wells notice regarding the sale of mutual funds that bought $1.5 billion in bonds that the Swiss-based bank had underwritten on the island, Bloomberg reported Friday.

The issue also has to do with “secondary market trading and associated disclosures” of closed-end funds — whereby UBS doesn’t agree to buy back the shares for customers who want to cash out — sold in Puerto Rico between 2008 and 2009 as part of its advisory services to the Commonwealth Employee Retirement System. UBS is no longer involved with the public agency.
However, on the SEC’s radar is the sale in 2008 of $2.9 billion in pension fund bonds, which produced $27 million in fees for UBS and its co-underwriters. Of the money garnered from that transaction, a UBS manager bought $1.5 billion in securities and funeled them into 20 other mutual funds sold by the bank. The bonds represented about 17 percent of the funds’ $8.9 billion in assets at the time, Bloomberg reported.
Because a Wells notice typically allows recipients to respond, there is a likely chance that the SEC may not purse a case against both the parent company in Switzerland and the local subsidiary, according to the Bloomberg report.
Moody’s Investors Service, Standard & Poor’s and Fitch Ratings all had rated the bonds — which were backed by future government contributions to the pension system — one step above junk. The closed-end funds, which include Puerto Rico Fixed Income Fund Inc., go through a process through which UBS publishes prices for the shares, which are not sold on an exchange, and for which there are no public records of trading volumes or prices.
The Commonwealth Employees Retirement fund had assets of $1.9 billion and liabilities of $18.9 billion as of June 2009, leaving it 90 percent underfunded. That same month, Héctor Mayol — who took over as administrator of the fund after the bond issue — ordered a study by financial analysis firm Conway Mackenzie on the agency’s fiscal problems. The Michigan-based firm concluded that the transaction ended up hurting the pension fund.
“The $3 billion pension obligation bond transaction was inherently flawed, misconceived and speculative as a mechanism to improve the system’s funding ratio,” Bloomberg cited the firm as saying. “It merely provided a short-term temporary cash measure which blindly guided decision makers despite many warning signs. The negative arbitrage and fees paid actually worsened the funding position.”
Mayol has since provided documents to the SEC regarding the UBS transaction.
The Puerto Rico Fixed Income Fund valued at $368 million yielded an annual return of 5.4 percent to investors between 2005 and 2010. Meanwhile 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 of the island aren’t required to register with the SEC. They’re also exempt from the Investment Company Act of 1940, so they avoid that law’s restrictions on transactions between funds and their managers, the Bloomberg story noted.
Author Details
Author Details
Business reporter with 30 years of experience writing for weekly and daily newspapers, as well as trade publications in Puerto Rico. My list of former employers includes Caribbean Business, The San Juan Star, and the Puerto Rico Daily Sun, among others. My areas of expertise include telecommunications, technology, retail, agriculture, tourism, banking and most other segments of Puerto Rico’s economy.

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