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The SEC Could Learn A Thing Or Two From Puerto Rico

August 23, 2018 Blog

Thousands of Puerto Rico residents have filed investment fraud cases against UBS, Santander, Banco Popular and Oriental.

Given the pain those investors are suffering in the aftermath of the collapse of Puerto Rico’s bond market, it’s hard to believe, but Puerto Rico could teach the Securities and Exchange Commission about protecting investors.

Indeed, the island commonwealth has its own tough fiduciary duty rule to protect investors from predatory brokers, like those who sold disastrous bonds and bond funds. But the SEC, under the current Republican administration, is unwilling to extend such a high standard of care to mainland investors.

Instead, the SEC earlier this year put out a tepid “best interest rule” that – admittedly – does not define what the best interest standard even means for investors!

The SEC rule also does not provide a legal remedy for defrauded investors to sue their brokers.

A report last month from CBS Money Watch emphasized the hazards of the SEC’s proposed regulation for investors.

“The rule would require brokers to act in the best interest of their customers when making recommendations regarding insurance or investment products,” according to the report. “But it doesn’t provide specifics about exactly how brokers are supposed to act in their customers’ best interest. The proposal also relies on brokers to disclose potential conflicts of interest to their customers, which assumes customers will be able to understand these disclosures and make informed choices.”

It’s easy to predict that brokers will hide behind the pages of disclosure they hand to clients when selling a toxic, high-cost investment product. The SEC’s proposal is a joke.

On the other hand, Puerto Rico’s fiduciary duty rule requires brokers to follow the “highest standards” in dealing with island customers. This has enabled them to recover millions in bond losses from the firms who peddled the risky investments.

The SEC’s proposal falls flat when providing U.S. investors with similar rules and protection. That prompted Senator Elizabeth Warren in an editorial this month on Bloomberg to voice a crystal-clear complaint.

“A fiduciary relationship is a defined legal concept,” Sen. Warren wrote. “Investment advisers already owe a fiduciary duty to their clients when they provide investment advice. There’s little reason not to apply the same standard to brokers who are providing similar advice. SEC Chairman Jay Clayton says the new SEC proposal ‘is definitely a fiduciary principle,’ but if that is the case, the SEC should say so explicitly in the final rule, rather than using a vague best-interest standard that isn’t currently defined.

“Second, the SEC should explicitly ban the most obvious forms of conflicted advice, like sales contests and quotas that encourage brokers and agents to make bad recommendations,” she wrote. “Third, the SEC shouldn’t rely on disclosure alone to protect customers. A number of studies have shown that disclosure fails to reduce the harm caused by conflicted advice, and brokers have every incentive to make the disclosures as ineffective as possible. A lawyer can’t represent his client’s opponent just because that conflict was disclosed, and the same should be true of a broker.”

“Finally, the SEC should include a strong enforcement mechanism by allowing investors to sue advisers who scam them,” Sen. Warren concluded.

It’s hard to believe, but Puerto Rico easily beats the SEC when it comes to investment fraud protection.

Zamansky LLC is a New York law firm which represents investors in court and arbitration cases against securities brokerage firms and issuers.  The firm may represent investors in cases against companies mentioned in this blog.  Zamansky LLC also represents investors in arbitration cases against UBS and other brokerage firms regarding Puerto Rico bonds and UBS closed end bond funds and other investments.