Who Will Decide the Fate of Puerto Rico’s Debt Crisis?

By Jacqueline Aleman

Puerto Rico and its state-owned agencies have amassed an estimated $70 billion of debt since 2006. That’s four times the debt that forced Detroit into bankruptcy two years ago. A bad combination of rising debt, slow economy, and decreasing population has pushed yields on Puerto Rico debt above those of Greece. The securities have been trading at distressed levels for nearly two years as investors doubted the commonwealth’s ability to repay its debt on time and in full. Puerto Rico warned in its latest quarterly filing that it may place a moratorium on debt payments in fiscal year 2016 if the government can’t cut spending or raise enough revenue to pay back the debt.

For 25 years, Puerto Rico has been caught in a devastating economic spiral. Decades of recession and slow economic growth forced a succession of governments to take out loans to cover budget deficits. With a junk status rating, Puerto Rico is trying to negotiate a new bond sale with Wall Street investors.

To attempt to deal with its debt, Puerto Rico has passed a law that would allow troubled agencies to seek bankruptcy protection. However, a federal judge struck down the law, ruling it violated the federal Bankruptcy Code. Puerto Rico is currently in the process of appealing that decision while also pushing for a law in Congress to amend the Bankruptcy Code to include Puerto Rico.

In the meantime, the island is raising taxes in order to find money to pay its creditors. However, the reality is that this could end up unfruitful. Tax evasion on the island is extensive. A recent study reported that Puerto Rico collects just 56 percent of the sales tax that are due.

In a further attempt to combat tax evasion, Puerto Rico recently passed a law requiring merchants to accept other forms of payment in addition to cash. The Padilla administration also wants to implement a value-added tax, a consumption tax that would be more difficult to evade.

Despite these efforts, many are skeptical about raising taxes to pay down the debt. Puerto Rico’s House recently voted down Padilla’s tax plan. San Juan Sen. Ramon Luis Nieves says he believes in the end, the commonwealth may simply be unable to pay its $70 billion debt in full. However, without enough money to pay its debts and with bankruptcy not being an option, it may ultimately be the bondholders on Wall Street who will decide the island’s future.

New FINRA Senior Help Line

By Christopher Palomo

This year FINRA proudly launched its first ever help line for seniors. The helpline is a source of free information and is FINRA’s latest effort in protecting investor rights. The program is designed to address the unique needs of one of the fastest growing communities of investors – senior citizens. With an estimated 10,000 Americans turning 65 every day and the unique concerns associated with this class of investors, such as lack of income, health concerns, and computer illiteracy, the need for action has never been greater. The helpline aims toward addressing these concerns by expediting the attention given to these investors by placing them a phone call away from the help they need. While the hotline is intended for seniors, no callers are turned away, regardless of their age.

The free hotline provides information ranging from:

  • understanding how to review your investment portfolio or account statements;
  • concerns about the handling of a brokerage account; and
  • investor tools and resources from FINRA, including BrokerCheck.

There is no experience level necessary to use the help line. The staff is not only knowledgeable and friendly, but also more than willing to answer any questions; from simple inquiries about the benefits of an IRA, to more complex questions concerning the suitability requirements for brokers.

While FINRA has and continues to make a variety of informational resources available to all investors, the hotline is specificall geared to address the unique needs of the senior community. Accordingly, it provides a means to cut through both the red tape and hundreds of pages of FINRA packets and instead allows seniors to speak to a real person about questions and concerns. Ultimately, the hotline is a gateway to the FINRA arsenal of resources. For instance, after calling, particular callers may be referred to various departments within FINRA, such as dispute resolution, to better serve their needs. However, most questions can be quickly addressed by the hotline staff.

The hotline information is as follows:

Call 844-57-HELPS (844-574-3577)
Monday – Friday
9 a.m. – 5 p.m. Eastern Time

The Investor Rights Clinic Sends FINRA Dispute Resolution Task Force Letter Proposing Changes to Benefit Small Claim Investors

FINRA provides the largest forum for the resolution of disputes between investors and their brokers. Indeed, because nearly all brokerage firms in the U.S. have included a pre-dispute arbitration provision in the agreements with their customers, individuals really have no choice but to pursue their claims in arbitration. In an effort to improve the transparency, impartiality and efficiency of the forum for all participants, FINRA formed a 13-member arbitration Task Force to solicit information and comments from all interested parties with the view towards making recommendations to FINRA’s advisory committee, the National Arbitration and Mediation Committee. [July 17, 2014 FINRA Press Release, at: http://www.finra.org/newsroom/2014/finra-announces-arbitration-task-force ]

Of particular concern to the Investor Rights Clinic (IRC) is the arbitration process governing small claims, specifically, matters with losses under $50,000. Those matters are generally handled under FINRA’s Simplified Arbitration process, which is anything but simple. However, investors with losses in this range frequently cannot find legal representation due to the size of the claim. Unless they have access to one of a handful of law school clinics, such as the IRC, they are faced with the choice of either pursuing their claim in an unknown and complicated forum, or forgoing their claim altogether.

As such, on May 13, 2015, the IRC submitted a detailed, 10-page-letter (FINRA Task Force Letter (2015)) to the Task Force, outlining a number of issues and suggestions regarding the small arbitration claims process. As the IRC explained in its letter, the IRC routinely deals with claims under $50,000, and its clients and callers requesting assistance “regularly share information about the particular difficulties they face in understanding whether they have a claim in the first place and, if so, how to navigate FINRA’s Dispute Resolution process.”

The recommendations the IRC made to the Task Force include, among other things:

• Establishing a short simplified arbitration guide (in English and Spanish) with filing forms that investors can complete, at their option;

• Providing for telephonic hearings for all small claims at the customer’s option (the only choice for investors today is to proceed entirely on paper submissions or ask for a full blown, in-person hearing);

• Establishing a dedicated roster of small claim arbitrators specially trained in dealing with unrepresented investors;

• In larger cases, giving the customer the choice of a hearing where they reside at the time the claim is filed (since many have moved or relocated since the transactions at issue); and

• Recommending additional, sustained funding to the law school clinics that, like the IRC, provide critical assistance to investors at no charge.

The Task Force should complete its work by the end of this year. Even if all of the proposals are not ultimately adopted by FINRA, the IRC appreciated the opportunity to speak on behalf investors with small claims. The IRC student interns who drafted the recommendation are: Thomas Hospod (’15), Alexandra Levenson (’15), Jessica Neer (’16) and David Tanner (’15).