FINRA Fines Popular Securities $125,000

FINRA recently announced that it has fined Popular Securities, Inc., now known as Popular Securities, LLC, $125,000 for supervisory failures related to sales of Puerto Rico Securities between July 1, 2011 and June 30, 2013. During this time period, customers of Popular Securities purchased concentrated positions in Puerto Rico municipal bonds and Puerto Rico closed end funds. FINRA found that Popular Securities failed to establish, maintain, and enforce a supervisory system and procedures reasonably designed to identify and review concentrated securities purchases, including Puerto Rico municipal bonds and Puerto Rico closed-end funds (“CEFs”).

In particular, FINRA found that Popular Securities’ written supervisory procedures (“WSPs”) failed to outline the steps that the Firm should have taken to review its customers’ securities purchases for concentration, and except for a procedure mandating quarterly reviews of “elderly” customer accounts for concentration of one product in the client’s account, the Firm failed establish, maintain, or enforce any systems or procedures that required supervisors to review for concentrated purchases (i.e., concentration in a single security, substantially similar securities, or securities of a single geographic region), including Puerto Rico securities, or document their reviews. In settling the matter, Popular Securities neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

The distributions paid by the Puerto Rico CEFs are tax-free, and only Puerto Rico residents may purchase the Puerto-Rico focused CEFs, which creates a very limited amount of qualified buyers for the CEFs. As a result, the illiquidity risk of the Puerto Rico CEFs was inherently high at all times.

In December 2012, Puerto Rico general obligation and related bonds’ ratings were downgraded. Approximately six months later, in June 2013, the Puerto Rico Power Authority OPREPA) revenue bonds’ ratings were also downgraded.

Popular was an underwriter of seven CEFs. CEFs differ from traditional open-end mutual funds in that open-end funds offer and redeem shares at the fund’s net asset value (“NAV”). CEF prices can be at a discount or premium to the NAV. UBS Puerto Rico was the primary underwriter of 23 CEFs with a total market capitalization of more than $5 billion. The majority of the holdings of the Popular and UBS CEFs are concentrated in Puerto Rico debt.

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