As Puerto Rico Bond Saga Continues, SEC Issues Three Investor Bulletins Regarding Municipal Bond Investments
When Puerto Rico filed for bankruptcy in May of 2017, investors holding the island territory’s municipal bonds lost what little hope they may have had to recover their investment losses. Since then, Puerto Rico’s financial situation has only gotten worse – due in part to the devastation caused by Hurricane Maria – and a workout plan proposed earlier this year would leave virtually nothing to repay bond investors.
For most investors, losing money in municipal bonds is the least of their concerns. Municipal bonds have always been considered among the safer investments, and investment advisors have traditionally recommended municipal bonds as assets for stable growth within a broader diversified portfolio. However, as the Puerto Rico debt crisis demonstrates, no investment is guaranteed, and investors unfortunately need to be cautious about relying blindly on the recommendations provided by their advisors.
Recently, the Securities and Exchange Commission (SEC) issued three Investor Bulletins addressing some of the risks associated with municipal bond investments. Here are some of the highlights for individual investors:
What are Municipal Bonds?
Municipal bonds are debt securities issued by states, U.S. territories, cities, towns, agencies, and other governmental and quasi-governmental authorities. As explained by the SEC:
“By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of your original investment, or ‘principal.’ A municipal bond’s maturity date . . . may be years in the future. Short-term bonds mature in one to three years, while long-term bonds may not mature for more than a decade. . . . If bonds are held to maturity, the investor will receive the face value amount back, plus interest that may be set at a fixed or floating rate. However, if a bond is sold prior to its maturity, the investor should receive the bond’s market value, which might be more or less than its face value.”
Since these investments are backed by government dollars, they are typically considered to be relatively-safe investments. But, if a municipality files for bankruptcy (as was the case with Puerto Rico in 2017 and Detroit in 2013), investors can still be at risk for losing their investment principal.
Diversification and Risk with Municipal Bond Investments
As a result of the risks associated with municipal bonds (and related investment products, such as leveraged municipal bond funds), investors must be cautious not to overconcentrate their portfolios in these investments. Investment advisors should help structure their clients’ portfolios to avoid overconcentration risk, and this includes diversification both (i) within investors’ bond holdings, and (ii) across different types of securities. When they fail to do so, they can be held legally accountable through arbitration proceedings before the Financial Industry Regulatory Authority (FINRA), and currently numerous investment advisory firms are facing arbitration claims filed by individual investors who have suffered losses in Puerto Rico municipal bonds and bond funds.
Along with the risk of bankruptcy, other risks associated with municipal bonds include:
- Call risk (the risk that a municipal bond will be retired before its maturity date)
- Inflation risk (the risk that inflation will devalue a fixed interest rate)
- Interest rate risk (the risk that changes in interest rates will affect bond values)
- Liquidity risk (the risk that a municipal bond may be difficult to sell)
For more information, you can read the new Investor Bulletins on the SEC’s website:
- Municipal Bonds – An Overview
- The Municipal Securities Market
- Municipal Bonds – Asset Allocation, Diversification, and Risk
Speak with an Investment Fraud Attorney at Zamansky LLC
If you have suffered investment losses in Puerto Rico municipal bonds or bond funds, you may be entitled to recover your losses through FINRA arbitration. The investment fraud attorneys at Zamansky, LLC represent individual investors in FINRA arbitration proceedings nationwide. To learn more in a free and confidential consultation, please call (646) 663-5628 or inquire online today.