A lead lawyer for UBS Financial Services in Puerto Rico, one of the
firms that sold the funds, raised the objection at a closed-door
meeting on Thursday between officials from the Financial Industry
Regulatory Authority, and lawyers for brokerage firms and investors,
the sources said. FINRA, Wall Street's industry-funded watchdog,
runs the forum in which investors and brokerages must resolve their
The group met to discuss how to deal with the logistics of hearing a
mounting number of arbitration cases in Puerto Rico, a U.S.
territory in the Caribbean where distance, a language barrier and a
limited number of arbitrators are presenting challenges for FINRA.
A sharp downturn in the value of Puerto Rico municipal bonds last
year resulted in big losses for investors in closed-end bond funds
with portfolios largely made up of those bonds. Lawyers for
investors have accused UBS and other brokerages of inappropriately
putting clients' money into those funds.
The sheer volume of the many cases expected could tax FINRA's
limited arbitration infrastructure in Puerto Rico.
"UBS believes that FINRA's existing rules on venue should be
followed," a UBS spokesman said in an email.
FINRA typically holds arbitration hearings at a location closest to
where the investor resides. However, arbitration rules give FINRA
broad authority to select and change the location.
FINRA said last month that it would stay many of the arbitration
cases involving the funds while it sorts out how to deal with the
flurry of cases being filed against UBS and other firms by investors
who live in Puerto Rico.
The regulator had been expecting at least 500 cases, but that figure
could now be as high as 750, sources said. Investors have filed
roughly 200 bond fund cases to date, according to a FINRA
spokeswoman. The stay applies to cases in which arbitrators were not
There are a total of nine FINRA arbitrators in Puerto Rico. Other
arbitrators who hear cases in Puerto Rico typically come from
More than 400 Florida-based arbitrators are willing to travel to
Puerto Rico to hear the bond fund cases, according to a FINRA
spokeswoman. Nonetheless, FINRA has also explored whether to hold
hearings in other locations, such as Florida and Texas.
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After Thursday's meeting, lawyers are awaiting FINRA's decision as
to how it will proceed.
The regulator has sent a recruiter to Puerto Rico in an effort to
find additional arbitrators locally, a spokeswoman confirmed.
It is unclear why UBS objects to holding the proceedings outside of
Puerto Rico. But lawyers said that hearing the cases only in Puerto
Rico makes it easier for UBS to work with witnesses there, such as
its brokers and branch managers, while possibly making the process
more difficult and costly for investors.
For example, U.S.-based lawyers who are handling the bond fund cases
must partner with lawyers in Puerto Rico in order to take part in
proceedings there, according to the rules of the Puerto Rico bar.
"I don't think there's any question that UBS wants to make this
process as long and as painful for burned investors as possible,"
said Andrew Stoltmann, a Chicago-based lawyer who represents
The cost of interpreters for Spanish-speaking claimants is another
concern. Lawyers for investors are pushing for FINRA to provide and
pay for interpreters. The issue, however, remains unresolved.
Lawyers have filed other claims against Santander Securities,
Popular Securities, Oriental Financial Services and Bank of
America's Merrill Lynch unit, they say.
(Reporting by Suzanne Barlyn; additional reporting by Tim
McLaughlin; editing by Linda Stern and G Crosse)
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