Massachusetts weighs Puerto Rico debt impact on mutual funds

NEW YORK – Massachusetts’ chief securities regulator will open an inquiry into the impact of Puerto Rican debt on the state’s mutual fund investors.

The investigation is meant to determine the extent of investors’ risk tied to the island’s weakening municipal debt obligations, Massachusetts Secretary of the Commonwealth William F. Galvin said today in a statement.

“Puerto Rico is currently on the verge of insolvency and many of its obligations are at or near junk rating,” according to the statement. “The risks associated with its municipal debt obligation are disproportionally high.”

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. The bonds’ high yields and tax-exempt status make them popular with retail investors, according to the statement.

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Galvin sent letters of inquiry to Fidelity Investments, OppenheimerFunds Inc., a unit of Massachusetts Mutual Life Insurance Co., and UBS Financial Services. The intent is to determine if and when investors were apprised of the risks of investing in Puerto Rico.

“OppenheimerFunds has contacted the secretary’s office and is cooperating fully with its inquiry,” the company said in an emailed statement. Spokesmen for Fidelity and UBS AG declined to comment.

Administrative leave

UBS said last week that it put an employee on administrative leave while the Zurich-based bank reviews loans issued to clients. One brokerage customer said he was given credit to buy risky bond funds holding the island’s government debt.

Investors in the $3.7 trillion municipal market are punishing Puerto Rico even after the nine-month-old administration of Governor Alejandro Garcia Padilla boosted pension contributions and raised taxes to keep the territory’s obligations from being cut to junk. His challenge is compounded by a shrinking local economy.

Garcia Padilla, 42, of the Popular Democratic Party, took office in January. He traveled to New York this week to discuss his fiscal and economic initiatives with ratings companies. Puerto Rico is graded one step above junk by the three major rating firms, with a negative outlook, and is preparing to borrow as much as $1.2 billion by year-end to balance budgets.

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