The Financial Industry Regulatory Authority Inc. (FINRA) released its 2013 regulatory and examination priorities letter. The annual letter alerts the broker-dealer community to what Finra examiners will be looking for in the coming year. FINRA will continue to watch yield-oriented products this year but FINRA also will be focusing on business development companies (BDCs), exchange-traded funds (ETFs) and products that use leverage and the use of automated investment advice writes Dan Jamieson in an article for InvestmentNews.com.

FINRA is “particularly concerned about sales practice abuses, yield-chasing behaviors and the potential impact of any market correction, external stress event or market dislocation on market prices,” FINRA said in the letter.

With reference to BDCs, FINRA warned that they have “significant market, credit and liquidity risks” and risk over-leveraging illiquid portfolios with low-cost financing. Leveraged loans are relatively illiquid and hard to value, while CMBS and high-yield often carry higher risks than normal, given their historically low yields, Finra said. High distribution rates on closed-end funds attract investors who may not understand that some of these funds are returning capital, the letter warned.

FINRA’s notice also expressed concern about a “proliferation” of ETFs and ETNs that use leverage or track volatility measures, emerging markets and currencies.

For the first time this year, FINRA examiners will be looking at the use of automated investment advice.

Just because FINRA doesn’t include something in a current letter doesn’t mean examiners won’t be looking into it.

Securities Lawyer, Lars K. Soreide, of Soreide Law Group, who represents clients nationwide before FINRA. For a free consultation with an attorney on how to potentially recover your losses, call 888-760-6552, or visit our website at: http://www.securitieslawyer.com.

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The Securities and Exchange Commission (SEC) announced on May 1, 2012, that they  charged UBS Financial Services Inc. of Puerto Rico and two executives with making misleading statements to investors, concealing a liquidity crisis, and masking its control of the secondary market for 23 proprietary closed-end mutual funds.

UBS Puerto Rico will settle the SEC’s charges by paying $26.6 million that will be placed into a fund for the “harmed investors.”

According to the SEC, UBS Puerto Rico misled its investors and failed to disclose that it controlled the secondary market, where investors could sell their shares in the funds. UBS Puerto Rico significantly increased its inventory holdings in the closed-end funds in order to prop up market prices, bolster liquidity, and promote the appearance of a stable market. However, UBS Puerto Rico later withdrew its market price and liquidity support in order to sell 75 percent of its closed-end fund inventory to unsuspecting investors.

UBS Puerto Rico’s vice chairman and former CEO Miguel A. Ferrer and its head of capital markets Carlos J. Ortiz, have SEC proceedings against them which they are contesting.

“UBS Puerto Rico denied its closed-end fund customers what they were entitled to under the law – accurate price and liquidity information, and a trading desk that did not advantage UBS’s trades over those of its customers,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Eric I. Bustillo, Director of the SEC’s Miami Regional Office, added, “We will aggressively prosecute firms that use conflicts of interest for their own financial gain.”

The SEC’s order states that beginning in 2008, UBS Puerto Rico solicited thousands of retail investors by promoting the closed-end funds’ market performance and continuously high premiums to net asset value (up to 45 percent) as the result of supply and demand in a competitive and liquid secondary market.  However, when investor demand began to decline, UBS Puerto Rico sought to maintain the illusion of a liquid market by buying shares into its own inventory from customers who wished to exit the market. Throughout a falling market, UBS Puerto Rico continued to sell shares by conducting primary offerings in order to grow its closed-end fund business.  UBS Puerto Rico failed to disclose the true state of the market to investors.

According to the SEC’s order, they state on their website that UBS Puerto Rico’s parent firm determined in the spring of 2009 that UBS Puerto Rico’s growing closed-end fund inventory represented a financial risk, and directed the firm to reduce its inventory by 75 percent to reduce that risk and “promote more rational pricing and more clarity to clients . . . [so] prices transparently develop based on supply and demand.” To accomplish the reduction, UBS Puerto Rico executed a plan dubbed “Objective: Soft Landing” in one document, which included:

• Undercutting numerous marketable customer sell orders to “eliminate” those orders and liquidate UBS Puerto Rico’s inventory first, preventing customers from selling their shares.
• Not disclosing that UBS Puerto Rico was drastically reducing its inventory purchases.
• Soliciting customers to sell recently purchased primary offering shares back to the closed-end fund companies, so UBS Puerto Rico could then sell closed-end funds to those customers from its highest inventory positions.

Additionally, UBS Puerto Rico increased solicitation efforts to further reduce its inventory while making misrepresentations and failing to disclose UBS Puerto Rico’s withdrawal of secondary market support.

According to the SEC’s website, UBS Puerto Rico agreed to settle the SEC’s charges, without admitting or denying the findings, that it violated Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(c) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The order requires UBS Puerto Rico to pay $11.5 million in disgorgement, $1.1 million in prejudgment interest, and a penalty of $14 million. In addition to the monetary relief, the SEC’s order censures UBS Puerto Rico, directs it to cease-and-desist from committing or causing any further violations of the provisions charged, and orders the firm to comply with its undertaking to retain an independent consultant at UBS Puerto Rico’s expense.

Also the SEC article states that the independent consultant will review the adequacy of UBS Puerto Rico’s closed-end fund disclosures and trading and pricing policies, procedures, and practices. UBS Puerto Rico shall abide by the determinations of the consultant and adopt and implement all recommendations.

Securities Lawyer, Lars K. Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you or a family member have sustained investment losses due to your stock broker or financial advisor’s recommendations of UBS Puerto Rico, call for a free consultation on how to potentially recover your losses. To speak with an attorney call 888-760-6552, or visit our website at: www.securitieslawyer.com.

Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.

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In an article from InvestmentNews.com, on July 25, 2011, Dan Jamieson writes that FINRA has warned investors about chasing yield with structured products, junk bonds and floating-rate bank-loan funds.

The Financial Industry Regulatory Authority (FINRA) issued an investor alert about the risks found in these and other products. The alert was prompted by “significant recent inflows” into high-yielding products, Finra said.

“Investors should always look behind an investment’s yield, ensure that they understand how the investment works and carefully consider its fees and risks before investing,” Gerri Walsh, vice president for investor education, said in a statement.

The structured products “can have significant drawbacks such as credit risk, market risk, lack of liquidity and high hidden costs,” the alert said.

Jamieson goes on to say that FINRA warned investors to watch for structured products that are callable, promise principal protection or have returns based on changes in the yield curve. While such investments could produce attractive returns, they also might “earn no return for the entire term of the note,” the alert said.

Also, FINRA warned that the market for floating-rate loans is “largely unregulated, relatively illiquid and difficult to value.”

The InvestmentNews.com article adds, FINRA says that floating-rate bank-loan funds may be less vulnerable to interest rate fluctuations, as well as offering inflation protection. The underlying loans, however, are “are subject to significant credit, valuation and liquidity risk.”

Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member have lost your investments through these risky investments, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com.

Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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