March 09,2017

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Congressional Committees Advance Bill Protecting Investors in Puerto Rico, U.S. Territories

Bipartisan Measure Would Close Decades-Old Loophole Allowing Conflict of Interest
Washington, DC – Congressional Committees moved Thursday to close a decades-old loophole that critics say has caused significant financial losses for many Puerto Rican investors and retirees.  The House Financial Services Committee and the Senate Banking Committee approved the “U.S. Territories Investor Protection Act”, legislation that would extend to investment companies operating in Puerto Rico and all the U.S. territories the same rules as those that apply on the U.S. mainland.

“Today’s action moves the ball forward on leveling the playing field and providing long overdue protections for U.S. citizens who reside in our nation’s territories,” said Senate Finance Committee Chairman Orrin Hatch (R-Utah).  “By closing this loophole, investors in these territories will be afforded the same protections as their fellow citizens in states across the country.”   

“For too long, due to an inexcusable oversight in federal investment law, residents of Puerto Rico did not have the same consumer safeguards as are available on the mainland,” said Rep. Nydia M. Velázquez (D-NY), the lead sponsor in the House. “The result has been that retirees and working families have been fleeced out of their life savings, suffering enormous losses on financial products they were sold by unscrupulous companies.  The legislation approved today will close this loophole and protect investors in Puerto Rico and other U.S. territories.”

“The more than 3.4 million U.S. citizens in Puerto Rico know all too well the damage unregulated bad actors can inflict,” said Senator Menendez (D-NJ), the lead sponsor in the Senate.  “Far too many seniors and retirees have lost their hard-earned savings due to this outdated and unfair exemption in our federal securities laws.  The legislation approved today will provide the same consumer safeguards to investors in Puerto Rico and other U.S. territories as are provided to investors on the U.S. mainland.”

“I’m proud to support this bipartisan bill because Puerto Rico is in the midst of a deep economic crisis,” said Rep. Duffy (R-WI), an original cosponsor of the bill.  “Protecting investors on the Island is an important step toward economic growth. Puerto Rican investors should not be denied the same protections as investors in Wisconsin, Texas, or New York."

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 repackaged those same bonds into mutual funds they sold 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.   The situation has been compounded by Puerto Rico’s ongoing debt crisis. Puerto Rican investors holding government bonds have suffered massive losses and are claiming that some financial companies did not properly disclose the risks of these funds, due to this conflict of interest.

At the time the exemption was created in 1940, it was suggested that Puerto Rico and other “U.S. possessions” were physically located too far away for the Investment Act protections to be enforced.  Since then both Hawaii and Alaska, which are farther away from the mainland than Puerto Rico, have been granted statehood and the protections in the 1940 Act. Additionally, air travel between the U.S. and Puerto Rico is common and many of these financial instruments are today traded electronically.

The legislation, S. 484 in the Senate and H.R. 1366, was approved in both Committees with bipartisan backing. The measures must now be considered by the full U.S. House and Senate.