Bloomberg -- UBS AG said it put a financial advisor on administrative leave in Puerto Rico while the Swiss bank reviews loans issued to clients. One brokerage customer said he was given credit to buy risky bond funds holding the islands government debt.
UBS employees in Puerto Rico circumvented curbs on margin loans to generate revenue for the Zurich-based company, according to a Sept. 30 arbitration claim filed in San Juan with the Financial Industry Regulatory Authority on behalf of Victor M. Gomez Jr. The bank didnt adequately explain that UBS controlled trading and set prices in the secondary market, according to the complaint, which cited a previous order from the SEC.
The firm is reviewing this issue of loans, said Karina Byrne, a spokeswoman for UBS, in an e-mailed statement. We have put one financial advisor on administrative leave, pending further review. She declined to name the advisor or comment on specifics of the claim, saying the bank hasnt been served with the filing.
The New York Times reported this week that UBS encouraged clients to borrow money to put in Puerto Rican bond funds. Prices of the islands municipal debt have been sliding as the commonwealths economy contracts. Bloomberg News obtained a copy of the complaint from Harold D. Vicente-Colon, a San Juan lawyer for Gomez who said he filed it with Finra.
CLOSED-END FUNDS
Registered representatives of UBS Financial Services Inc. of Puerto Rico offered clients loans secured by shares they already owned in closed-end mutual funds, which are generally concentrated in Puerto Rico bonds, according to the claim. The funds also leverage their portfolio by financing about half of the assets, according to the filing. Because they are leveraged, no margin is suitable or licit for the financing of their respective shares, according to the claim.
UBS representatives routed the proceeds of the loans back to the securities accounts of their clients and used the money to buy even more shares of UBS funds, according to the complaint.
By opening lines of credit and disbursing UBS Bank loans to clients, the company violated loan procedures required by the Federal Deposit Insurance Corp., according to the claim.
MARKET WEAKNESS
General weakness in municipal markets across the U.S. and Puerto Rico and apprehension about the direction of interest rates have led to steep declines in Puerto Rico municipal bond and closed-end fund prices and a lack of liquidity for these securities, Byrne said in an e-mailed statement.
The bank requires clients to sign documents affirming that they wont use loans that pledge securities as collateral to buy more investments, Byrne said.
Interest on debt issued by Puerto Rican governments is typically tax-free across the U.S., and yields on some issues topped 10 percent in recent weeks amid doubt about whether investors will be repaid. General obligation bonds from the self-governing commonwealth of about 3.7 million people are rated one step above junk as Governor Alejandro Garcia Padilla strives to reduce budget deficits and strengthen a pension system thats more underfunded than any U.S. state.
The credit rating on Puerto Ricos senior sales-tax revenue bonds was lowered two levels by Moodys Investors Service on Oct. 3. Moodys cut the rating to A2 from Aa3 on $6.8 billion of the securities, saying Puerto Ricos weak economy has significantly limited growth in sales taxes.
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