WASHINGTON – House Financial Services Committee members unanimously approved a bill on Thursday that would put an end to a current legal loophole that a lawmaker contends allowed broker-dealers to defraud Puerto Rico investors.
The U.S. Territories Investor Protection Act of 2016 (H.R. 5322), introduced in May by Rep. Nydia M. Velázquez, D-N.Y., would extend to Puerto Rico the same protections under the Investment Company Act of 1940 as those afforded to investors residing on the U.S. mainland.
Velázquez contends that, under a loophole in the Investment Company Act of 1940, some broker-dealers underwrote Puerto Rico bonds and then repackaged them into mutual funds and sold them to Puerto Rican investors without disclosing the risks in some cases.
While this type of arrangement is legal in Puerto Rico due to an exemption in the 1940 act, it's prohibited on the mainland.
Velázquez says the situation has been compounded by Puerto Rico's debt crisis.
"Retirees and other vulnerable citizens are being fleeced because of this outdated exemption in federal investment law," Velázquez said. "This bill would ensure statutory parity by ending this practice."
When the exemption was created in 1940, Puerto Rico and other U.S. possessions were considered to be physically located too far away for the Investment Act protections to be enforced, according to Velázquez. But since then both Hawaii and Alaska, which are farther away from the mainland than Puerto Rico, have been granted statehood and, as a result, the protections in the 1940 Act, she said. Also, air travel between the U.S. and Puerto Rico is common and many of these financial instruments are today traded electronically, Velázquez noted.
"It is absurd to suggest that we are unable to have a robust financial regulatory presence in Puerto Rico for geographical reasons," she said. "All this exemption does today is enrich large financial companies at the expense of vulnerable retirees and working families."
The bill, approved by a vote of 59 to 0, will move to the full House for consideration.
