WASHINGTON – Two proposed companion bills designed to end a legal loophole that lawmakers allege allowed broker-dealers to defraud Puerto Rico investors have received committee approval and are now pending before the House and Senate.
The two identical pieces of legislation, called the U.S. Territories Investor Protection Act, were approved by the House Financial Services Committee and the Senate Banking Committee. They would extend all the rules under the Investment Company Act of 1940 that apply to investment companies on the U.S. mainland to those investment companies operating in Puerto Rico and the U.S. territories.
Rep. Nydia Velazquez, D-N.Y., introduced a version of the bill during the last congressional session that passed the House but did not gain further traction. She is the lead sponsor of the bill pending in the House (H.R. 1366), which was passed by the Financial Services Committee unanimously.
"For too long, due to an inexcusable oversight in federal investment law, residents of Puerto Rico did not have the same consumer safeguards as are available on the mainland," Velazquez said in a release. "The result has been that retirees and working families have been fleeced out of their life savings, suffering enormous losses on financial products they were sold by unscrupulous companies."
Sen. Robert Menendez, D-N.J., is the lead sponsor of the bill (S. 484) pending in the Senate. He served with Velazquez on the Congressional Task Force on Economic Growth in Puerto Rico that the PROMESA bill established to help find solutions that would aid in combatting the territory's fiscal crisis. The task force released a report at the end of 2016 with numerous recommendations, including for Congress to pass Velazquez's U.S. Territories Investor Protection Act.
"The more than 3.4 million U.S. citizens in Puerto Rico know all too well the damage unregulated bad actors can inflict," Menendez said. "Far too many seniors and retirees have lost their hard-earned savings due to this outdated and unfair exemption in our federal securities laws."
The bill sponsors said that under a loophole in the Investment Company Act, broker-dealers have been able to act as underwriters for the issuance of Puerto Rican bonds and have repackaged those same bonds into mutual funds whose shares they then sell exclusively to investors on the island. The Investment Company Act would prohibit that arrangement from happening on the mainland.
"The situation has been compounded by Puerto Rico's ongoing debt crisis," the bill sponsors said in a release. "Puerto Rican investors holding government bonds have suffered massive losses and are claiming that some financial companies did not properly disclose the risks of these funds, due to this conflict of interest."
Rep. Sean Duffy, a Wisconsin Republican who also served on the congressional task force, and Sen. Orrin Hatch, a Utah Republican who chaired the task force, also said they are pleased to see the bills move out of committee.
"Today's action moves the ball forward on leveling the playing field and providing long overdue protections for U.S. citizens who reside in our nation's territories," said Hatch, chair of the Senate Finance Committee.
The loophole was first created because Puerto Rico and the other U.S. territories were physically located too far away for the Investment Act protections to be enforced, the bill sponsors said. They added that plane travel and the frequent use of electronic trading of financial instruments have eliminated the problems caused by the physical distance.
