Brokers and Brokerage Firms Avoid Puerto Rico Municipal Bonds

Some brokerage firms are limiting many investors' access to Puerto Rico's municipal bonds as concerns about the island's financial health continue to grow. Puerto Rico municipal bonds have been popular with investors for their high yields and special tax benefits. But as the outlook for Puerto Rico's economy has continued to look worse, Puerto Rico bonds have become more and more risky. Investors who were advised to place to much of their money in Puerto Rico municipal bonds or in funds concentrated in Puerto Rico municipal bonds may be able to file a FINRA arbitration claim to recover Puerto Rico bond losses.

Some Puerto Rico municipal bonds have lost 60 to 70 percent of their value. Economic growth and tax collections in Puerto Rico have been weak, and unemployment in Puerto Rico is sky high. As a result, firms like UBS now require investors to sign risk acknowledgments in order to purchase Puerto Rico bonds. Raymond James has been restricting investors' access to Puerto Rico's bonds due to the "uncertain nature" of Puerto Rico's finances. And an investment strategist with brokerage firm Janney Montgomery Scott advises that investors limit Puerto Rico holdings to no more than 5% of a muni-bond portfolio.

Brokerage firms generally place restrictions on the purchase of securities only in extreme cases. And such restrictions are particularly unusual in the municipal-bond market, which until recently has been considered a safe harbor for retail investors and retirees to protect their savings and earn a modest interest rate.

Consistent with brokerage firms' advice, large mutual funds have been selling their Puerto Rico bond holding. Earlier this month, Putnam Investments put nearly $50 million of its Puerto Rico bond holdings for sale in a single trading session. Fund companies, including Franklin Templeton, Eaton Vance Corp., Nuveen Investments, also have been decreasing their Puerto Rico bond holdings over the past year, according to Morningstar. Franklin Templeton has reduced its Puerto Rico bond holdings by more than $1 billion in the past year.

On the other hand, some money managers, such as Oppenheimer and AllianceBernstein, reportedly see the recent increase in the Puerto Rico's borrowing costs (i.e., the interest rate that the bonds pay) as a buying opportunity.

Notwithstanding the differing views on the direction of Puerto Rico's economy, Puerto Rico municipal bonds are not for the faint of heart. The market has spoken and the reality is that Puerto Rico municipal bonds generally are viewed a risky investment. A 2012 audit showed that Puerto Rico has a $1.337 billion budget deficit and the commonwealth's three pensions funds were, combined, more than 91% unfunded.

If you suffered losses in Puerto Rico bonds or funds holding Puerto Rico bonds, contact Dimond Kaplan & Rothstein, P.A. for a free consultation with one of our securities arbitration lawyers. We will advise you whether we believe you have a valid claim to recover your investment losses.

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