Financial Crime World

Puerto Rico Banking Regulation Reforms: US Congress Passes Law to Protect Investors

In a significant move aimed at preventing future financial crises, the US Congress has passed legislation requiring banks selling mutual funds in Puerto Rico to comply with key investor protections. The new provision, signed into law by the president on May 24, closes a 78-year-old loophole that contributed to Puerto Rico’s current debt crisis.

A Historical Loophole Closed

The Investment Companies Act of 1940 will now apply to financial institutions operating in Puerto Rico, ensuring they cannot engage in risky deals or “double dipping” on transactions. Prior to this change, such practices were exempt from federal regulations, leading to the creation of riskier investment products that ultimately resulted in billions of dollars in losses for Puerto Rican investors.

A Step Towards Greater Transparency and Accountability

The reform was included in broader legislation aimed at rolling back banking regulations passed in the Dodd-Frank bill after the 2008 financial crisis. While the larger bill has been criticized for heightening the risk of improper financial activities, advocates argue that the inclusion of this provision will help protect Puerto Rico’s investors from predatory practices.

Quotes from Advocates

  • “I am heartened that we can no longer hear about people being swindled out of their nest egg due to an antiquated loophole in federal investment law.” - Rep. Nydia Velazquez, who authored the amendment
  • “It doesn’t fix what happened, but hopefully going forward we can avoid this story from repeating itself.” - Sergio Marxuach, policy director at the Center for a New Economy

Key Provisions of the Reform

  • The Investment Companies Act of 1940 will now apply to financial institutions operating in Puerto Rico
  • Financial firms have three years to comply with new regulations
  • Firms can petition the Securities and Exchange Commission for additional time if needed

Impact on Investors and Financial Markets

While the reform does not address the island’s current economic situation or recoup losses for investors, advocates hope it will prevent similar situations from occurring in the future. The move is seen as a step towards greater transparency and accountability in Puerto Rico’s financial markets, and could help rebuild trust between investors and financial institutions.