Puerto Rico Investing
UBS in Puerto Rico Pension Gets Fee Bonanza Seen as Conflicted
UBS AG, the troubled Swiss financial giant, has found a little slice of paradise in Puerto Rico. In 2007, UBS Financial Services Inc. of Puerto Rico, a wholly owned subsidiary of Zurich-based UBS, became financial adviser to the island’s Employees Retirement System, which provides pensions for 278,000 government workers and retirees. In 2008, UBS took the lead when the fund sold $2.9 billion in pension bonds, producing $27 million in fees for the Swiss bank and its co-underwriters. The bonds, which are backed by anticipated future government contributions to the fund, were rated just one step above junk by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. In many parts of the world, UBS is in retreat. Switzerland’s largest bank by assets eliminated 5,777 employees worldwide in 2008, reported losses of $16.77 billion and will sell toxic assets to the Swiss central bank for $39.1 billion. On Feb. 18, UBS agreed to pay the U.S. government $780 million to settle allegations that it had helped thousands of wealthy Americans evade taxes. Five of UBS’s mutual funds, Puerto Rico Fixed Income Funds I through V, owned more than $1 billion of the pension fund bonds as of Sept. 30, and the pension debt made up 30 percent of the funds’ assets. The pension bonds, with a yield of 6.5 percent, have lost about 10 percent of their value in the past year, according to data compiled by Bloomberg. Thanks to a loophole in U.S. securities law, funds established in Puerto Rico and sold only to residents of the island aren’t required to register with the Securities and Exchange Commission. They’re also exempt from the Investment Company Act of 1940, so they avoid that law’s restrictions on transactions between funds and their managers.