UBS Puerto Rico Family of Funds

Puerto Rico's Flag The Florida securities arbitration lawyers at McCabe Rabin, P.A. are investigating the marketing and sales to investors of the UBS Puerto Rico Family of Funds, proprietary closed-end bond funds sold by brokers with UBS Financial Services, Inc. of Puerto Rico. Specifically, the firm is investigating whether UBS made adequate disclosures to investors concerning the funds' liquidity, heavy use of leverage, and the risk of using margin or lines-of-credit to purchase the funds.

The UBS Puerto Rico Family of Funds ("PR Funds") consists of 14 closed-end funds that are primarily invested in Puerto Rico municipal debt.

  • Tax-Free Puerto Rico Fund, Inc.
  • Tax-Free Puerto Rico Fund II, Inc.
  • Tax-Free Puerto Rico Target Maturity Fund, Inc.
  • Puerto Rico AAA Portfolio Target Maturity Fund, Inc.
  • Puerto Rico AAA Portfolio Bond Fund, Inc.
  • Puerto Rico AAA Portfolio Bond Fund II, Inc.
  • Puerto Rico GNMA & U.S. Government Target Maturity Fund, Inc.
  • Puerto Rico Mortgage-Backed & U.S. Government Securities Fund, Inc.
  • Puerto Rico Fixed Income Fund, Inc.
  • Puerto Rico Fixed Income Fund II, Inc.
  • Puerto Rico Fixed Income Fund III, Inc.
  • Puerto Rico Fixed Income Fund IV, Inc.
  • Puerto Rico Fixed Income Fund V, Inc.
  • Puerto Rico Fixed Income Fund VI, Inc.

According to UBS, it has sold approximately $10.5 billion worth of the PR Funds exclusively to Puerto Rico residents. Unfortunately for investors in the PR Funds, the eroding municipal bond market has caused a dramatic loss in the value of the PR Funds in a relatively short period of time.

Liquidity Risks

Unlike open-end funds, closed-end funds such as the PR Funds, issue a fixed number of shares to raise capital. After the total number of shares is reached, the shares may only be traded on a secondary market between investors. Closed-end funds, such as the PR Funds, are not listed on an exchange and may be illiquid. The PR Funds also differ from open-end funds, in that, the PR Funds do not issue new shares or redeem existing ones.

Heavy Use of Leverage

The PR Funds are highly leveraged. For example, the Tax Free Puerto Rico Fund II, Inc. has an average leverage ratio of 53%. This means that, for each dollar of assets obtained by the fund with customer money, the fund obtains another dollar with borrowed money. Use of leverage in a fund can magnify losses.

It is believed that the other PR Funds were similarly leveraged. According to Morningstar, similar funds in the United States have an average leverage ratio of only 22%.

Buying With Borrowed Money

McCabe Rabin is investigating whether UBS brokers encouraged their clients to increase their buying power by obtaining lines-of-credit from UBS or buying the shares on margin. An investor's losses are exacerbated when the value of their shares drops below the margin loan balance, and the shares are liquidated at a loss to meet margin calls.

Brokers may have marketed the PR Funds as a way to benefit from the funds' exemption from Puerto Rico and United States estate and gift taxes, without adequately explaining the risks involved with investing in closed-end funds, and the use of leverage and margin. FINRA rules require that brokerage firms have a reasonable basis to recommend a specific investment to its clients, and in some instances, the firms may have recommended the PR Funds to risk-averse investors for whom the investments were unsuitable.

The securities arbitration attorneys at McCabe Rabin are investigating whether UBS adequately disclosed the nature and risk of investing in the PR Funds to potential investors.

Investors who have suffered a loss of $100,000 or more as a result of an investment in one or more of the UBS Puerto Rico Family of Funds purchased through UBS, and who may have a FINRA arbitration claim, may contact the Florida securities lawyers at McCabe Rabin, P.A. for a free and confidential consultation by calling toll free at 877.915.4040 or by e-mail to kelly@mccaberabin.com.

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