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UBS Bank Loans

UBS extended bank loans to many Puerto Rico residents who allege they were improperly encouraged to use the funds to invest in UBS Puerto Rico Bond Funds. UBS bank loans can wipe out an investor’s brokerage account equity in a short period of time. The use of UBS bank loans collateralized with brokerage account assets exposes investors to greater risk and costs. UBS loan interest increases the breakeven rate of return required for a particular investment strategy. A brokerage account cost ratio measures breakeven rate of return which includes all costs, including commissions and margin interest. When UBS loans are used, the required net rate of return needed to breakeven increases to pay all interest costs. The higher required rate of return that is necessary may require a change from a more conservative investment strategy to a riskier one. This greater return and its corresponding risk was not disclosed to all Puerto Rico investors. This fact must be weighed carefully and disclosed by a brokerage firm and its stockbroker. Some brokerage firms and stockbrokers recommend the use of margin to diversify. The use of margin or bank loans in many situations is considered unsuitable investment advice.

UBS Brokers Receive Financial Incentives to Recommend Margin Loans

UBS Financial Services of Puerto Rico provides financial incentives to stockbrokers who recommended the use of UBS loans in brokerage accounts because the lending activities represent a substantial source of revenues. The margin loans are fully collateralized with no chance of default because of the protections provided to the brokerage firms in the margin agreements. Margin agreements and lending regulations create a risk free lending business model for brokerage firms. For these profits, financial incentives are given to financial advisors whose clients’ accounts have margin loans. These incentives include greater commissions because it increases the amount of assets the financial advisor can manage.

Understanding Risks of UBS Loans

UBS loans are very risky and are only suitable for sophisticated investors who can assume the substantial risk of loss in invested capital. Before an investor uses bank loans or margin, they should be advised by brokerage firms and stockbrokers that:

  • they can lose more money than their initial investment;
  • they may have to deposit additional cash or securities in their account to meet margin calls;
  • they may be forced to sell some or all of their account positions to meet margin calls; and
  • brokerage firm may sell some or all of your securities without consulting you to meet margin calls.

UBS Financial Services of Puerto Rico recommended strategy increased risks because UBS Puerto Rico Bond Funds were not actively traded and without a liquid market to sell these funds outside of UBS.

Tax Treatment of UBS Loan Interest

In some instances, UBS Financial Services of Puerto Rico and their financial advisors advised customers to use UBS loans because of the tax deductibility. In some instances, they suggest that all the interest is tax deductible. However, multiple factors need to be taken into consideration including:

  • Margin interest deduction for interest paid, not a just accrued;
  • Margin interest, as it relates to taxable investments such as stocks, bonds or certificates of deposit are subject to the investment interest limitations;
  • UBS loan secured with UBS Puerto Rico Bond Funds may reduce the amount of loan interest that is tax deductible;
  • Margin interest is only deductible to the extent of taxable dividends and interest; and
  • There may be no margin interest deductions for margin balances attributed to personal expenditures.

Most brokerage firm compliance manuals prohibit financial advisors from providing tax advice. Nonetheless, many financial advisors do so when they recommend the use of margin and state that the margin interest is tax deductible.

Our team of lawyers can help you determine whether an investment loss is the result of a brokerage firm and their financial advisor’s unsuitable use of margin in an investment account. If an investor suffers losses as a result of margin calls they may be able recover their losses in a FINRA arbitration claim.