A lawmaker in the U.S. House of Representatives is seeking to close a legal loophole that’s prevented 3.5 million residents of Puerto Rico from enjoying investor safeguards that have been in place in the mainland for 75 years.
Representative Nydia Velazquez, a New York Democrat who sits on the House Financial Services Committee, plans to introduce a bill Friday that would eliminate Puerto Rico’s exemption from the Investment Company Act of 1940, which regulates the conduct of mutual-fund companies, according to a draft copy provided to Bloomberg News.
The limited reach of the law allowed UBS AG to steer Puerto Rico bonds that it underwrote into its mutual funds, which cost investors when the securities tumbled because of the island’s worsening fiscal crisis.
In 2008, when UBS underwrote $2.9 billion of bonds for the cash-strapped Employees Retirement System, funds managed by the bank bought about half the debt. That would have been barred by the Investment Company Act if the funds were sold on the mainland, as reported by Bloomberg on Sept. 22.