UBS Recommends Puerto Rico Funds to Island’s Clients Amid Losses

Oct. 17 (Bloomberg) — UBS AG, the Swiss bank that reached a $5.2 million settlement with Puerto Rico this month over sales of closed-end funds, will keep recommending debt from the commonwealth to investors from the island.

Brokers may suggest the funds, as long as they’re consistent with bank policy, according to an internal memo, the contents of which were confirmed by Karina Byrne, a New York- based spokeswoman. The memo was reported earlier today by Reuters.

The settlement announced Oct. 9 by Puerto Rico’s Office of the Commissioner of Financial Institutions includes $1.7 million of restitution to 34 investors. In addition, UBS is to pay $3.5 million into a fund for securities trading, investor education and investigations.

“Puerto Rico municipal bonds and Puerto Rico closed-end funds provided excellent returns for more than a decade, and because they are exempt from most Puerto Rico and United States estate and gift taxes, they offered many benefits to Puerto Rico investors,” Byrne said in an e-mailed statement.

UBS began facing claims a year ago that its employees in Puerto Rico circumvented curbs on margin loans to generate revenue for the Zurich-based bank. A Sept. 30 arbitration claim filed in San Juan with the Financial Industry Regulatory Authority said the lender didn’t adequately explain that UBS controlled trading and set prices in the secondary market.

Puerto Rico and its agencies, with about $73 billion of debt, were cut to speculative grade this year on concern that the island may fail to meet its obligations as its economy deteriorates.

Commonwealth securities are mired in their longest skid since July as hedge funds and other distressed investors sell the debt. Puerto Rico has been relying on those buyers as its ratings have fallen.

To contact the reporter on this story: Brian Chappatta in New York at [e-mail] To contact the editors responsible for this story: Stephen Merelman at [e-mail] Alan Goldstein, Mark Tannenbaum