Increasing Transparency in Cases Restructuring Puerto Rico’s Debt to Prevent Conflicts of Interest (H.R. 1192)

What is H.R. 1192?

(Updated February 23, 2022)

This bill was enacted on January 20, 2022

This bill — the Puerto Rico Recovery Accuracy in Disclosures Act (PRRADA) of 2021— would require professionals employed in debt adjustment cases involving Puerto Rico to file verified statements disclosing their connections with the debtor, creditors and other interested parties before seeking compensation for their services.

Argument in favor

Disclosing and preventing conflicts of interest in bankruptcy proceedings is an accepted protection in bankruptcy proceedings on the U.S. mainland. The same standards should apply in the Puerto Rico government’s debt resolution proceedings.

Argument opposed

As currently written, this legislation’s disclosure requirements are too broad and would apply to too many people. The volume of disclosures that this legislation would require would be overwhelming; therefore, the disclosure requirements in this legislation should be refined before it is implemented.

Impact

Businesses and individuals connected to debtors, creditors, and other parties involved in Puerto Rico’s resolution of government debt; Puerto Rico’s government; Puerto Rico’s Fiscal Control Board (FCB); and conflict of interest disclosures in Puerto Rican government debt proceedings.

Cost of H.R. 1192

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sponsoring Rep. Nydia Velázquez reintroduced this bill from the 116th Congress to close a loophole in Puerto Rico’s debt restructuring process under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) that was passed in 2016. Testifying before the House Judiciary Committee in support of this legislation in the previous Congress, Rep. Velázquez said:

“This important bill will close a loophole in the Island’s debt restructuring process, improve transparency, and restore confidence and integrity in the process. Before Hurricane Maria devastated Puerto Rico in late 2017, the island was already in a deep recession brought on, in part, by trying to pay down over $120 billion in government debt. In response, Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act – or PROMESA – in 2016 to set up an orderly bankruptcy process to restructure this debt, stimulate economic development, and put the Island on a path to financial recovery… As the committee is aware, the trust the American people have placed in our Bankruptcy system is based on a fair, efficient, and transparent process. Transparency, as required by section 327 of the Code and Rule 2014, applies to every corporate bankruptcy and ensures any conflicts of interest — or even the perception of a conflict — between those working on the bankruptcy and the debtor are disclosed. However, PROMESA does not have a similar requirement. My bill would address this oversight and apply a robust disclosure requirement to all PROMESA Title III proceedings, eliminating the double standard that the People of Puerto Rico are facing. Puerto Ricans should be confident that the Board’s bankruptcy advisors don’t have their ‘thumb on the scale’ to favor certain debts where they have a self-interest and ensure integrity in the PROMESA process.”

House Judiciary Committee Chairman Jerrold Nadler (D-NY) supported this legislation in the 116th Congress. He said:

“Although largely patterned on Chapter 11 of the Bankruptcy Code, PROMESA did not incorporate all facets of Chapter 11 and other relevant provisions of the Code, including, for example, the Code’s mandatory disclosure requirements regarding actual or potential conflicts of interest that professional persons seeking to be retained in a bankruptcy case must make to the court prior to their retention. This bill would close that loophole and, to quote our colleague from New York, Ms. Velázquez, who authored the bill, 'improve transparency and restore confidence and integrity' in Puerto Rico’s restructuring process.”

Natalie Jaresko, Executive Director of the Financial Oversight and Management Board (FOMB) for Puerto Rico, expressed support for this legislation while testifying before the House Committee on Natural Resources in a June 11, 2020 hearing on PROMESA implementation during the COVID-19 pandemic:

“FOMB continues to support the legislative proposal of Rep. Velazquez in the bill to extend the disclosure requirements of the Federal Rules of Bankruptcy Procedure to professionals employed by FOMB, Court, or debtor to avoid conflicts of interest and advance greater transparency and disclosure. The proposal, however, needs to be modified to assure its practical implementation. It currently requires disclosures of each professional's connections with all creditors, and in the Puerto Rico Title III cases over 165,000 creditors filed proofs of claim. We look forward to working with Congress on technical amendments to further the bill's objectives.”

In the 117th Congress, this legislation has six bipartisan House cosponsors, including four Democrats and two Republicans. Last Congress, this legislation passed the House by voice vote with the support of 33 bipartisan House cosponsors, including 26 Democrats and seven Republicans.

Of Note: Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in 2016 to set up an orderly bankruptcy process to restructure Puerto Rico’s debt, stimulate economic development and put the island on a path to financial recovery. The legislation established a financial oversight board, the Fiscal Control Board (FCB). It also implemented a process for restructuring debt and expedited processes for approving infrastructure projects to combat the island government’s debt crisis.

A board-appointed law firm investigating potential conflicts in Puerto Rico’s bankruptcy exposed the need for this legislation when it found that trading in Puerto Rico public debt is particularly problematic, as it gives rise to the appearance of conflict.

In 2018 and 2019, numerous high-profile articles detailing consulting firm McKinsey’s potential conflict of interest noted the company’s ownership of Puerto Rican government bonds even while it advised the island’s government on a financial overhaul to lighten its debts.

Media:

• Sponsoring Rep. Nydia Velázquez Testimony (116th Congress)
  
• House Judiciary Committee Press Release (116th Congress)
  
• New York Times (Context)
  
• House Committee on Natural Resources Hearing (Context)