FINRA Sales Practice Violations

Bank Loans and Margin Calls

Brokerage Firms through subsidiaries and affiliated lenders solicited the use of credit through bank loans and brokerage account margin to Puerto Rico customers, and improperly recommended credit facilities to invest in non-traded, closed-end Puerto Rico Bond Funds. The recommended use of bank loans and brokerage account margin collateralized with Puerto Rico Bond Funds and Puerto Rico Municipal Bonds exposed customers to undisclosed risks and costs. Bank loan and margin interest increased the breakeven rate of return required for the recommended investment strategy. The breakeven rate of return is increased by all costs, including commissions and margin interest. The greater the breakeven rate of return increases, the greater the assumed risk which was not disclosed to all Puerto Rico investors. The use of bank loans and brokerage account margin secured by highly-leveraged non-traded, closed-end Puerto Rico Bond Funds is unsuitable investment advice.

Financial Advisors Paid Incentives to Recommend Bank and Margin Loans

Brokerage firms provide financial incentives to its financial advisors that recommend the use of bank loans and brokerage account margin because the bank lending is profitable to brokerage firms. Brokerage account margin loans are fully collateralized with protections provided to the brokerage firms through the terms of the margin agreements. For these profits, financial incentives are paid to financial advisors whose clients’ accounts collateralize bank loans and brokerage account margin loans, representing a conflict of interest. Additionally, there is a financial incentive in the form of greater commissions generated through increased assets financial advisors can manage.

Bank Loans and Margin Risk

Bank loans and brokerage account margin are unsuitable for Puerto Rico customers with investment objectives of current income and safety of principal. Brokerage firms and its financial advisors should advise their customers when using bank loans and brokerage account margin that:

  • customers can lose more money than their initial investment;
  • customers may have to deposit additional cash or securities in their account to meet margin calls;
  • customers may be forced to sell some or all of their securities to meet margin calls; and
  • Brokerage firms may sell some or all of your securities for a margin call without consulting customer.

Brokerage Firms’ recommended use of leverage creates extraordinary risks because Puerto Rico Bond Funds were not actively traded and without a liquid market to sell these funds outside of the non-traded, closed-end fund’s Repurchase Agreement, investors were required to sacrifice their other personal assets to meet margin calls.

Klayman & Toskes, P.A. and the Carlo Law Offices are dedicated to the rights of Puerto Rico investors. Our legal team can help you determine what steps can be taken to protect your investor rights. Puerto Rico investors who suffered losses as a result of the use of bank loans and brokerage account margin to invest in Puerto Rico Bond Funds may be able recover their losses in a FINRA arbitration claim.

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Visit our Website for the Recovery of UBS Puerto Rico Bond Fund Losses

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For more information on how to start a claim, or to find out if you have a meritorious cause of action, please contact our law firm, toll free, at (787) 268-6444, for a free consultation.

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