Newark, N.J. – US Senator Bob Menendez (D-N.J.), senior member of the Senate Banking Committee, issued the following statement after the full Senate unanimously approved his bipartisan legislation, the U.S. Territories Investor Protection Act (S.484). The bipartisan legislation aims to close a decades-old loophole that has contributed to significant financial losses for many Puerto Rican investors and retirees by ensuring investment companies operating in Puerto Rico and all the U.S. territories play by the same rules as those on the U.S. mainland.

“While the 3.4 million Puerto Ricans that live on the island are U.S. citizens, there are still too many significant differences in the way they are treated by the government when compared to the rest of the nation, including by the financial services industry,” said Menendez. “With the passage of this commonsense legislation, and as Puerto Rico continues to face an economic crisis of historic proportions, we have come one step closer to correcting this oversight so seniors, retirees, and investors don’t have to worry about losing their hard-earned savings due to an outdated and unfair exemption in our federal securities laws.”

The Investment Company Act of 1940 that would be expanded to cover Puerto Rico and all U.S. Territories under this law is a key regulatory policy that governs American investment companies, including those that offer mutual funds, exchange-traded funds, as well as hedge funds. It delineates the types of activities that such companies can undertake and establishes standards for their conduct.

“The U.S. Territories Investor Protection Act doesn’t seek to provide Puerto Rican investors and retirees with special treatment – on the contrary, it would simply provide long overdue equal treatment and protections to fellow Americans. I am thrilled the Senate acted unanimously in approving this important proposal based on the idea that there are no exceptions to the ways in which we must protect investors and hold companies accountable. I will continue working with my colleagues across the aisle to make sure this legislation lands on the President’s desk for his signature as quickly as possible,” concluded Menendez.

The U.S. Territories Investor Protection Act (S.484) was cosponsored by Senators Orrin Hatch (R-Utah); Catherine Cortez Masto (D-Nev.), and Marco Rubio (R-Fla.). Companion legislation in the house is being championed by Representative Nydia M. Velázquez (D-NY) was approved by the U.S. House of Representatives earlier this year.

It has been publicly reported that some actors in Puerto Rico used the current law’s loophole to act both as an underwriter for the issuance of bonds, and then repackaged those same bonds into mutual funds they sold exclusively to investors on the island. While this type of arrangement is legal in Puerto Rico due to the 1940 exemption, it would be prohibited on the U.S. mainland. The situation has been compounded by Puerto Rico’s ongoing debt crisis. Puerto Rican investors holding government bonds have suffered massive losses and are claiming that some financial companies did not properly disclose the risks of these funds, due to this conflict of interest.

At the time the exemption was created in 1940, it was suggested that Puerto Rico and other “U.S. possessions” were physically located too far away for the Investment Act protections to be enforced. Since then both Hawaii and Alaska, which are farther away from the mainland than Puerto Rico, have been granted statehood and the protections in the 1940 Act. Additionally, air travel between the U.S. and Puerto Rico is common and many of these financial instruments are today traded electronically.