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UBS in Hot Seat Over Puerto Rico Municipal Bond Funds

The recent meltdown of Puerto Rico municipal bonds has found financial services giant UBS AG in a familiar place, the hot seat.

Switzerland-based UBS has been the target of the Department of Justice and the IRS for allegedly helping wealthy Americans hide assets since roughly 2008. In 2009, UBS paid a $780 million fine and disclosed data on 250 client accounts to avoid prosecution on allegations of aiding and abetting U.S. tax evaders. It later disclosed information on an additional 4,450 accounts.

A federal grand jury in Ft. Lauderdale issued an indictment in November 2008 charging Raoul Weil, the former chairman and chief executive officer of UBS’ global wealth management and business division, with conspiring with other UBS executives to assist some of UBS’s American clients in hiding approximately $20 billion of undeclared assets. A copy of the indictment can be read here. Several years after being declared a fugitive, Weil was arrested last week in Bologna, Italy. Weil now faces extradition to the United States to answer charges of aiding and abetting tax evaders.

Now the latest chapter in the UBS saga involves the sales of bond funds containing primarily Puerto Rico municipal bonds. Specifically, UBS is under fire for the sale of its proprietary Puerto Rico Family of Funds (“PR Funds”) through its subsidiary UBS Financial Services, Inc. of Puerto Rico. The 14 closed-end funds are comprised largely of Puerto Rico municipal bonds and were marketed and sold exclusively to Puerto Rico residents. According to a brochure on the PR Funds issued by UBS, as of September 2012, the PR Funds contained approximately $10.5 billion in assets. A full list of the PR Funds can be found here.

Puerto Rico municipal bonds’ tax exemptions make them a popular choice for fund managers. According to the Daily Business Review, more than 75 percent of U.S. municipal bond funds contain Puerto Rico debt.

The island’s financial woes have had a direct impact on the funds with any significant exposure to its debt. According to Bloomberg, the Commonwealth is saddled with $19,000 of debt for every Puerto Rico resident. With fears that the island would default on its debt, the bonds took an immediate hit. The island’s credit rating is barely above “junk” level and its bonds are trading at low levels.

According to the Wall Street Journal, the Securities and Exchange Commission (“SEC”) has issued requests to several mutual fund companies with large exposure to the island’s debt for information concerning their Puerto Rico municipal bond holdings.

Massachusetts secretary of the commonwealth William Galvin announced he is investigating three of the largest holders of Puerto Rico debt, OppenheimerFunds, UBS and Fidelity.

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