AFL-CIO Seeks SEC Probe of Mutual Fund Firms on Puerto Rico

  • OppenheimerFunds, Franklin hold the most debt among funds
  • Labor group questions firms’ valuations of commonwealth debt

The AFL-CIO, the largest U.S. labor-union federation, is urging the Securities and Exchange Commission to investigate whether OppenheimerFunds Inc. and Franklin Templeton Resources adequately valued their Puerto Rico bond holdings as the island’s fiscal crisis worsened.

The American Federation of Labor and Congress of Industrial Organizations wants the SEC to look into whether the companies took account of market swings when reporting the net asset value of funds holding commonwealth debt, Heather Slavkin Corzo, the AFL-CIO’s director of the Office of Investment, wrote in a letter Monday to the SEC.

The value of Puerto Rico securities have plunged because of the island’s escalating fiscal crisis, which led it to default on some securities since August. The commonwealth wants investors to accept less than they are owed and is backing legislation advanced in the U.S. Congress that would give it legal ability to restructure its debt. The measure leaves the status of the priority of payments to pensions and bondholders unclear.

“There have been numerous market events that could affect the current value of both companies’ funds, yet it is unclear from the filings examined if and how those events were factored in to each companies’ valuation methods,” Slavkin Corzo wrote in the letter.

Speaker’s Request

The AFL-CIO’s letter follows a similar request this month by New York City Council Speaker Melissa Mark-Viverito. She asked the SEC on May 5 to investigate whether OppenheimerFunds complied with securities laws and regulations regarding its investments in commonwealth debt.

The AFL-CIO represents 12.5 million U.S union members in 56 unions. Union-related retirement plans hold more than $587 billion in assets, according to the letter.

“Union members have substantial exposure to the capital markets and have an interest in the precedent set with respect to the valuation practices of money managers,” Slavkin Corzo wrote.

OppenheimerFunds and Franklin Templeton Resources have purchased Puerto Rico securities for years and are the two biggest investors in the island’s debt among U.S. municipal mutual funds. Oppenheimer held $3.5 billion of Puerto Rico securities for a 15 percent allocation as of March 31, according to Morningstar Inc. That’s down from $4.77 billion at the start of 2014. Franklin Templeton held $1.4 billion of commonwealth debt for a 2 percent allocation as of March 31. That’s less than half the $3.7 billion that Franklin held at the end of 2013, according to Morningstar.

Oppenheimer uses independent valuations from third-party pricing services, said Kimberly Weinrick, a spokeswoman at the firm.

“We are transparent with investors regarding the valuation practices of our funds’ portfolio holdings,” Weinrick said. “These valuations reflect fair-market value and conform with generally accepted accounting principals.”

Stacey Coleman, a spokeswoman for Franklin Templeton, said the company “employs a rigorous pricing process that is consistent with regulatory requirements. In addition, Puerto Rico bonds have been actively traded for years which provides real-time price information for valuation of our portfolios.”

Judith Burns, a spokeswoman at the SEC, declined to comment.

Puerto Rico and its agencies owe $2 billion on July 1, which Governor Alejandro Garcia Padilla has said the island cannot pay unless creditors agree to restructuring deals. The commonwealth’s Government Development Bank defaulted on $370 million of debt May 2, the largest such payment failure for the island.

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