Two Puerto Rico Bond Funds Move to Wind Down After Activist Campaign Ousts UBS

The boards intend to sell and pay out while the funds remain registered, because deregistration would destroy the Puerto Rico tax exemption that made the shares worth holding.

August 18, 2026

Two of the Puerto Rico closed-end bond funds at the center of a five-year governance fight are now asking their shareholders to shut them down.

Tax-Free Fixed Income Fund II for Puerto Rico Residents and Tax-Free Fixed Income Fund IV for Puerto Rico Residents have scheduled separate special meetings for October, at which holders of each fund will vote on two linked measures: to cease operating as investment companies, and to sell substantially all of the portfolio and pay the proceeds out as a dividend. Both boards, chaired by Ethan A. Danial, declared the plan advisable at an August 12 meeting and recommend approval of both items. The meetings are hybrid sessions at the San Juan offices of Ferraiuoli LLC and by webcast, with the two funds voting separately.

How the funds got here

The wind-down is the endgame of a campaign that began in 2021, when Ocean Capital and a group of affiliated individuals started nominating directors and pressing governance proposals across the family of Puerto Rico funds then advised by UBS Asset Managers of Puerto Rico. Ocean Capital’s nominees won the votes at four consecutive annual meetings of Fund IV, but the fund declined to seat them and instead sued Ocean Capital and other defendants over alleged securities law violations. Ocean Capital counterclaimed to have its directors seated.

The First Circuit affirmed dismissal of the fund’s claims in May 2025, and within days the inspectors of election certified the withheld results — seating Ocean Capital’s directors and certifying shareholder proposals directing termination of the funds’ advisory and management agreements with UBS. Those terminations landed roughly a year apart: Fund IV parted with UBS on July 19, 2025, while Fund II shareholders passed their own termination proposal at an annual meeting eventually held on June 16, 2026, with UBS and the fund treating August 15, 2026 as the effective date.

An adviser clock is now running

Neither fund has a permanent adviser. Atlas Asset Management stepped in on an interim basis at Fund IV in July 2025, and shareholders approved a new agreement with the firm in December 2025 that runs only through November 30, 2026. Fund II entered its own interim arrangement with Atlas effective August 17, two days after UBS exited, under an agreement that can remain in place until January 14, 2027.

Those dates bracket the wind-down timetable: the boards are seeking shareholder authority for a liquidation while operating on advisory contracts that expire within months.

The case for closing rests on scale

Each fund carries operating costs the boards describe as disproportionate to its asset base, compounded by the compliance, custody, audit, legal and reporting expenses that come with registered investment company status — all borne indirectly by shareholders. Neither fund has issued new shares since registering under the Investment Company Act on May 21, 2021, and both boards see limited scope to grow given focused mandates. Secondary market trading is thin and the shares have changed hands at a substantial discount to net asset value. Against that, a payout at NAV less reserves looks to the boards like the better outcome.

They examined and rejected the two conventional fixes:

• Merger into an open-end fund — not feasible on timing, cost and uncertainty grounds.
• Conversion to open-end form — would not solve the cost problem, and could shrink the funds further through redemptions.

Sequencing is the whole ballgame on tax

The order of operations matters more here than in a typical liquidation, because the funds’ value proposition is a Puerto Rico tax exemption that deregistration destroys. Once a fund ceases to be treated as a registered investment company under the Puerto Rico Internal Revenue Code, it becomes taxable as a regular corporation from the date of deregistration, regardless of whether it satisfies the code’s distribution requirement. Dividends would then fall under the general regime — a 15 percent withholding on distributions to Puerto Rico individuals, potential alternate basic tax exposure, and an 85 percent dividends received deduction for Puerto Rico corporate holders.

So the boards intend to sell the securities, declare and pay the dividend, and only then apply to the SEC for deregistration. Done in that sequence, qualifying shareholders keep the preferential treatment. The funds expect the payments will more likely than not be characterized as liquidating distributions, meaning a Puerto Rico holder is generally treated as having sold the shares for the cash received and recognizes gain or loss against basis, long-term if held more than a year. An initial dividend is targeted within 30 days of shareholder approval, though the funds say they cannot predict how long the full process will take.

Approving the deregistration measure also means giving up the 1940 Act protections that come with registration: limits on borrowing and senior securities, the prohibition on affiliate transactions, shareholder approval of fundamental policy changes, rules governing distributions and repurchases, equal voting rights across shares, bank custody of assets and fidelity bonding. Shareholders get no appraisal rights in connection with either proposal.

A tender offer at a discount, still in brackets

Alongside the vote, the boards describe plans for each fund to launch a tender offer by Schedule TO in September, repurchasing a portion of outstanding common stock at a stated percentage of NAV rather than at NAV itself. The offers would be conditioned on approval of the dividend proposal and could be postponed or pulled if that approval does not come. Undersubscribed offers would be filled entirely; oversubscribed ones prorated. The boards frame the discount as accretive to the shareholders who stay, while giving those who want out sooner a route to cash ahead of the dividend. The percentages, the NAV date and the payment date are all blank in this preliminary version.

The dividend will not reach every position

Some portfolio holdings carry transfer restrictions imposed by the underlying issuers and securities law conditions on resale, and the funds warn there is no assurance they can be sold quickly given a narrow pool of buyers. Anything that cannot be monetized would be dropped into a liquidating trust, with shareholders receiving pro rata interests and waiting for the trust to sell. Shareholders should expect the dividend to come only from the liquid book, reduced by expenses, liabilities and the limits Puerto Rico corporate law places on what a board may declare.

What advisers cannot yet size

The payout itself. Net asset values per share, total managed assets, expense ratios, share counts, the record date, the meeting date and the proxy solicitor and its fee are all left blank. The only holder figures disclosed are Ocean Capital’s positions — listed at 2,709,608 shares of Fund II and 1,405,171 shares of Fund IV, with the corresponding percentages omitted. Danial is credited with holdings through RAD Investments in both funds; the remaining directors and officers report none.

Each proposal needs the 1940 Act majority: more than half the outstanding shares, or two-thirds of those present where a majority is represented. The two are not conditioned on each other. If the deregistration measure fails, the fund stays registered while its board weighs next steps, including resubmission. If the dividend measure fails, the fund keeps its portfolio and must continue investing to its stated objective.