WASHINGTON - Rep. Nydia Velázquez wants to extend protections under the Investment Company Act of 1940 to Puerto Rico, saying their absence caused Puerto Ricans to suffer losses when they invested in mutual funds heavily stocked with the financially struggling commonwealth's bonds.
The Democrat from New York introduced the "Puerto Rico Investor Protection Act of 2015" on Friday to close what she said is the "longstanding loophole" that Congress created in 1940 when it decided the territory was too far away to enforce the act's regulations on companies operating within its boundaries and exempted them from the law. The proposed bill is expected to be referred to the House Committee on Financial Services, where Velázquez sits along with the bill's co-sponsor and the panel's top Democrat, Rep. Maxine Waters, D-Calif.
The proposed legislation, which regulates conflicts of interest in investment companies among other things, would also extend the act to regulate companies operating in the Virgin Islands and all other U.S. possessions.
Velázquez said she is specifically concerned that many Puerto Rican's near retirement age have already seen "significant losses" because the act does not apply to the commonwealth.
"It is outrageous that, when investing their hard earned money for retirement, Puerto Ricans are not afforded the same transparency requirements and consumer protections that apply in the mainland," Velázquez said. "This archaic exemption is long overdue for repeal and my bill would do exactly that."
In her statement on the bill, Velázquez said the bill is directed at the actions of "some actors in Puerto Rico" that underwrote bonds and then "repackaged" them into mutual funds they exclusively sold to investors on the island. The firm most publicly criticized for those actions is UBS Group AG, which currently faces more than $1.1 billion in legal claims. The claims have already resulted in several Financial Industry Regulatory Authority arbitration decisions in favor of the investors. UBS told the investors their mutual fund investments were safe but the investors later watched as the funds deteriorated along with Puerto Rico's fiscal situation.
The Investment Company Act would have prohibited UBS' actions if it had applied to Puerto Rico, according to Velázquez.
"Large investment companies are taking a fee for acting as an advisor to Puerto Rican public entities, then repackaging bonds they issued into mutual funds, which they then in turn sell to unsuspecting Puerto Rican consumers," Velázquez said, adding it is a "flagrant conflict of interest."
A UBS spokesperson declined to comment for this article.
