The U.S. House of Representatives has voted to pass legislation that would get rid of exemptions from federal securities law for registered securities offered in U.S. territories, including Puerto Rico. The bill is called the U.S. Territories Investor Protection Act of 2016. Rep. Nydia Velazques (D-NY), who sponsored the legislation, said that if passed into law it would give key protections to American citizens in the territories. The bill would also put an end to long standing exemptions that were granted to territorial securities under the Investment Company Act.
Rep. Velazquez believes that had there been such a law previously, certain investment losses that have been sustained in the U.S. territories could have been prevented. She recently noted that certain issuers of securities in Puerto Rico have allegedly become their own underwriters, allowing them to sell and package the securities without letting investors know of this conflict of interest.
Unfortunately, this exact situation is what played out in Puerto Rico over the last decade. Many residents in Puerto Rico have suffered because they were not told of conflicts of interest and about how risky the bond funds they bought were. Their losses have been further compounded by the U.S. territory’s debt crisis. Puerto Rico owes $70 billion to investors, many of whom purchased the bonds indirectly through bond funds.
With Velazquez’s bill, investment companies on the island and other U.S. territories would have to deal with the same rules as their counterparts on the mainland. The legislation includes a three-year grace period for companies to get into compliance with new rules. (It also grants the SEC the authority to extend that timeframe via rulemaking if necessary.)
Last month, U.S. President Barack Obama signed into law PROMESA, the Puerto Rico Oversight Management and Economic Stability Act, which will help the island restructure its debt. On July 1, Puerto Rico defaulted on $911 million of bond payments that were due to creditors that day. At least $799 million of that was general obligation debt, which was supposed to be constitutionally guaranteed. However, Puerto Rico Governor Alejandro Garcia Padilla issued a debt moratorium that made the default on these debt payments possible.
At a municipal finance event at the Brooking Institute his week, Governor Padilla told attendees that he did not believe Puerto Rico would be able to borrow from the municipal bond market for a while. He anticipated that it could be two years before that market would be open to Puerto Rico again.
In the meantime, Bloomberg reports, the Puerto Rico Aqueduct & Sewer Authority wants to issue new debt through a new agency to help pay for construction work that had to be delayed because of the island’s economic crisis. The utility, known as PRASA, would grant investors first claim on revenue collected from sewer and water bills. PRASA previously worked out a deal with creditors to delay paying them the $12.7 million they are owed.
Our Puerto Rico municipal bond fraud lawyers at Shepherd Smith Edwards and Kantas have spent the last three years helping investors in Puerto Rico and the mainland to recoup their losses from investing in Puerto Rico bonds and Puerto Rico closed-end bond funds. Many of these investors, including those seeking to avail themselves of the territory’s tax-free bonds, were not apprised of the risks involved in purchasing these securities.
We believe that certain brokerage firms, including UBS Puerto Rico (UBS-PR), Banco Santander (SAN), and Banco Popular, knew of the risks even though they did not make sure that investors were aware of the speculative nature of the investments.
To request your free case consultation, contact our Puerto Rico muni bond fraud law firm today.
House Votes To End Securities Law Exemptions In Puerto Rico, Law360, July 11, 2016
Committee Approves Velázquez Bill Protecting Investors in Puerto Rico, U.S. Territories, Velazquez.House.Gov, June 16, 2016
Puerto Rico Plotting Bond-Market Return After Its Record Default, Bloomberg, July 12, 2016