(SI Newswire) Washington, DC – As Puerto Rico’s debt crisis continues unfolding, Rep. Nydia M. Velázquez (D-NY) is introducing legislation to close a longstanding loophole that has caused significant financial losses for many Puerto Rican investors. The “Puerto Rico Investor Protection Act of 2015” would extend to investment companies operating in Puerto Rico the same safeguards that govern investment activity in the United States. The exemption, which was written into the Investment Company Act of 1940, has allowed abuses resulting in Puerto Ricans – many of them near or of retirement age – to invest in mutual funds heavily stocked with public debt bonds that have dropped significantly in value due to Puerto Rico’s debt problems.
“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.”
It has been publicly reported that some actors in Puerto Rico have used the current law’s loophole to act both as an underwriter for the issuance of bonds, and then repackage those same bonds into mutual funds they sell exclusively to investors on the island. While this type of arrangement is legal in Puerto Rico due to the 1940 exemption, it would be prohibited on the U.S. mainland.
“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 added. “This practice constitutes a flagrant conflict of interest and it must stop.”
At the time the exemption was created, it was reasoned that Puerto Rico and other “U.S. possessions” were physically located too far away for the Investment Act protections to be enforced. Puerto Rican investors holding these bonds have suffered massive losses and mutual fund customers have filed hundreds of arbitration claims with the Financial Industry Regulatory Authority. They are seeking more than $1.1 billion in damages after losses in the tax-free bond funds, sold as high-income investments that would preserve their capital, and in the bonds themselves.
“It is absurd to suggest we are unable to have a robust financial regulatory presence in Puerto Rico for geographical reasons,” Velázquez added. “Air travel from the mainland and Puerto Rico happens frequently and many investments are now purchased and sold electronically. All this exemption does today is help enrich large financial companies at the expense of vulnerable investors, working people and retirees.”
Velázquez’s bill will be introduced in the U.S. House on Friday. It is expected to be referred to the House Committee on Financial Services. Velázquez, the first Puerto Rican woman elected to Congress, is the third most senior Democratic Member of the Financial Services Committee.