By Svea Herbst-Bayliss and Tim McLaughlin
BOSTON Oct 9 U.S. mutual funds that loaded up
on Puerto Rico bonds, including OppenheimerFunds, are now the
target of an investigation by a state securities regulator, who
says investors may not have been aware of their exposure to the
island's fiscal crisis.
The probe by Massachusetts' top securities regulator could
spark other investigations because many other state-specific
municipal bond funds include Puerto Rico debt in their
portfolios, according to analysts. The bonds are exempt from
federal, state and local income taxes in all U.S. states, making
them attractive to mutual fund managers across the country.
William Galvin, the Massachusetts Secretary of the
Commonwealth, said he is investigating three large fund
managers, Fidelity Investments, OppenheimerFunds, a unit of
MassMutual Life Insurance Co. and UBS Financial Services
, to determine how they sold mutual funds with heavy
concentrations of Puerto Rico debt and how they disclosed the
"Puerto Rican bonds are like sugar in a bakery product. They
are always included. Now the question is just how much and what
were investors told," Galvin told Reuters.
The three funds companies were the first to receive inquiry
letters from Galvin's office, though other fund companies put
Puerto Rico bonds in their mutual funds. Fidelity and UBS
declined to comment on Galvin's investigation.
OppenheimerFunds, in a statement, said its Puerto Rico
investments are disclosed and discussed at length in the funds'
public disclosures. The company also said it is cooperating
fully with Galvin's inquiry.
Galvin said the companies have a few weeks to respond on how
they disclosed the risks associated with Puerto Rico debt.
Puerto Rico bond prices have been in a free fall amid
renewed fears about the island's chronic deficits, free spending
and high unemployment. The S&P Municipal Bond Puerto Rico Index
is down 19 percent in 2013. The index is badly underperforming
the S&P National AMT-Free Municipal Bond Index, which is down
only 3.6 percent this year.
OppenheimerFunds' Rochester municipal bond funds have been
among the most aggressive in the industry with their heavy
concentration of Puerto Rico debt. The $69 million Oppenheimer
Rochester Massachusetts Municipal Fund, for example,
has nearly 17 percent of its assets in Puerto Rico debt,
according to Lipper Inc, a unit of Thomson Reuters.
Galvin's investigation centers on determining the extent
Massachusetts' investors were adequately made aware of the risks
associated with their investments, Galvin said in a press
release. The debt obligations were typically sold through a
mutual fund, he said.
"Puerto Rico is currently on the verge of insolvency and
many of its obligations are at or near junk rating, thus the
risks associated with its municipal debt obligation are
disproportionately high," Galvin said in a statement.