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Exclusive: UBS fighting proposal to move Puerto Rico bond fund cases

A Swiss national flag (top) and a flag of the city of Basel fly over the entrance of a branch office of Swiss bank UBS in Basel October 22,
A Swiss national flag (top) and a flag of the city of Basel fly over the entrance of a branch office of Swiss bank UBS in Basel October 22,

By Suzanne Barlyn

(Reuters) - A unit of UBS AG is objecting to a plan that would allow hundreds of investors who lost money in closed-end Puerto Rico bond funds to arbitrate their claims against the firm on the U.S. mainland, according to people familiar with the matter.

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 legal disputes.

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 yet assigned.

There are a total of nine FINRA arbitrators in Puerto Rico. Other arbitrators who hear cases in Puerto Rico typically come from southern Florida.

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.

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 investors.

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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