UPDATE 1-U.S. SEC eyes mutual funds with Puerto Rico debt exposure
By Sarah N. Lynch and Lisa Lambert
Oct 24 (Reuters) - Examiners at the U.S. Securities and Exchange Commission have started reaching out to mutual funds with exposure to Puerto Rican debt, a spokesman for the agency said on Thursday.
"Our examiners are reaching out to firms per usual to get a sense of their exposure and how they're managing it," SEC spokesman John Nester told Reuters.
SEC examiners routinely inspect mutual funds for compliance with federal securities laws, but they also sometimes launch specialized reviews into certain risk areas.
If examiners uncover problems, they could potentially refer them to the SEC's enforcement division for further investigation.
Puerto Rico has the highest interest rates of any big U.S. municipal bond issuer, a sign that the prices on its bonds are scraping bottom as the commonwealth struggles to right its troubled economy.
After four years of recession, concerns have been raised about the possibility of default, spurring bondholders to sell off the territory's debt, which tops $70 billion.
The S&P Municipal Bond Puerto Rico Index is down 17 percent so far in 2013.
States and the federal government do not tax interest paid on Puerto Rico's bonds, which makes the high-yielding debt appealing for mutual funds.
But many investors are not aware that their state-specific funds hold those higher-risk bonds.
On Wednesday, Massachusetts' top securities regulator William Galvin said he planned to ask the SEC to change rules that allow money managers to put high concentrations of Puerto Rican debt into state-specific municipal bond funds.
His office has also opened an investigation into whether investors in his state were adequately informed about the risks of Puerto Rican debt in municipal bond funds.
Fidelity Investments, OppenheimerFunds - a unit of MassMutual Life Insurance Co - and UBS Financial Services have all received letters from Galvin's office.
The query by SEC examiners was reported earlier on Thursday by the Bond Buyer.
The SEC is the federal regulator for mutual funds and requires them to make detailed disclosures about their holdings, financial performance and potential risks.