A cadre of top Senate Democrats has asked the Securities and Exchange Commission “to investigate potential fraud and illegal conduct, which may have contributed to Puerto Rico’s debt crisis.”

“Several colleagues have joined me in a letter to you and the Commission urging you to be a cop on the beat of Wall Street, but also on the streets of San Juan,” Sen. Bob Menendez (D-N.J.) told SEC chair Mary Jo White during a recent Senate Banking Committee hearing.

Sens. Elizabeth Warren (D-Mass.), Chuck Schumer (D-N.Y.), Kirsten Gillibrand (D-N.Y.), Bernie Sanders (D-Vt.), Jeff Merkley (D-Ore.) and Richard Blumenthal (D-Conn.) co-signed the letter. They called upon the SEC to probe possible municipal bond market manipulation, conflicts of interest, trading practices, and fraud in the underwriting, sale, distribution, and trading of municipal securities of and relating to Puerto Rico, as well as any other fraudulent, illegal or wrongful conduct.

Puerto Rico is approximately $71 billion in debt, with an estimated pension liability of $46 billion and debt service payments that consume more than one-third of its revenues. Congress recently approved legislation that would allow the Puerto Rican government to restructure its debt. 

“The residents of Puerto Rico and its municipal entities merit the full attention of the SEC to investigate any possible misconduct by financial advisors to municipal entities in Puerto Rico in the years leading to the current crisis” the letter says. “As you know, the Dodd-Frank Act included important provisions to reform the regulation of the municipal bond markets and specifically mandated that municipal entities be protected from fraud and abuse. In light of Puerto Rico’s municipal debt crisis, we write to ask that you investigate possible market manipulation, conflicts of interest, trading practices, and fraud in the underwriting, sale, distribution, and trading of municipal securities of and relating to Puerto Rico, as well as any other fraudulent, illegal or wrongful conduct.”

Section 975 of the Dodd-Frank Act amended the Securities Exchange Act of 1934 to now require the Municipal Securities Rulemaking Board to adopt and impose on financial professionals rules “designed to prevent fraudulent and manipulative acts and practices…and, in general, to protect investors, municipal entities, obligated persons, and the public interest.” In addition to this legal mandate, the Exchange Act gives the SEC and Financial Industry Regulatory Authority (FINRA) broad enforcement and examination authority to implement the “municipal entity protection” mandate. 

The SEC has in the past devoted significant attention to municipal securities markets, the letter explains. In 2010-2011, it held multiple field hearings that shed light on serious deficiencies and illegal practices that harmed investors and state and local governments. The hearings also informed a report later released by the SEC in 2012 on the state of municipal securities market, which called for far-reaching reforms. Some, but not all, of those reforms have been implemented. They were in addition to what were then-still-new rules mandated by the Dodd-Frank Act requiring municipal advisors to register with the SEC and MSRB and be subject to a series of conflicts of interest, competency, anti-manipulative, and fiduciary duty rules. 

“Separate from Congressional efforts to provide a path for Puerto Rico out of its municipal debt crisis, we believe that SEC should immediately commence an investigation into the acts, actions, and activities in connection with the underwriting, sale, distribution and trading of Puerto Rico debt in the years leading up to the present crisis,” the letter concludes. “The SEC should determine whether laws and rules have been broken and whether illegal conduct occurred. Without this, there is a risk that investors will not regain confidence in Puerto Rico’s debt markets and Puerto Rico’s access to normal credit markets will remain impaired.”

        

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