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 and UBS Financial Services , to determine how they sold mutual funds with heavy concentrations of Puerto Rico debt and how they disclosed the risk.
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"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.