WASHINGTON – A bill meant to end a legal loophole that lawmakers allege allowed broker-dealers to defraud Puerto Rico investors has passed the House and will now move to the Senate for consideration.

The House bill (H.R. 1366), called the U.S. Territories Investor Protection Act, was approved by a voice vote on Monday. It 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 other U.S. territories.

Rep. Nydia Velázquez, D-N.Y.
“Today’s bipartisan action in the House is a huge step for the people of Puerto Rico, and I will keep applying pressure for Senate action,” said Rep. Nydia Velázquez, D-N.Y.

Rep. Nydia Velázquez, D-N.Y., is the lead sponsor. She introduced a similar measure during the last congressional session that failed to gain traction after passing the House.

“Today’s bipartisan action in the House is a huge step for the people of Puerto Rico, and I will keep applying pressure for Senate action,” Velázquez said.

A companion bill in the Senate (S. 484), sponsored by Sen. Robert Menendez, D-N.J., has already cleared the Senate Banking Committee.

Both Menendez and Velázquez were members of the bipartisan, eight-member Congressional Task Force on Economic Growth in Puerto Rico that the PROMESA law established to help find ways to help combat the territory’s fiscal crisis. The task force released a report at the end of 2016 with numerous recommendations, including passage of Velazquez’s U.S. Territories Investor Protection Act.

Menendez and Velázquez have 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.

Jenniffer González, Puerto Rico’s nonvoting member of Congress and a co-sponsor of Velázquez’s bill, said during a floor speech before Monday’s vote that the loophole had allowed UBS to market managed Puerto Rico bond mutual funds to investors on the island without explaining the risks. González said a vote in favor of the bill is a step to “help end such outrageous investment abuse and gives Congress another opportunity to align the laws governing Puerto Rico and the other territories with the laws governing the fifty states.”

Velázquez said the legislators had “acted in the best interest of retirees and individual investors in Puerto Rico.”

“For far too long, Puerto Rican retirees and others have been preyed on by unscrupulous investors who have exploited this disparity in the rules,” she said. “By passing this measure in the House, we are one step closer to putting an end to these abuses.”

The loophole was first created because Puerto Rico and the other U.S. territories were located too far away for the Investment Act protections to be enforced, Velázquez said. However, she said that plane travel and the frequent use of electronic trading of financial instruments have eliminated the problems caused by the physical distance.

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