UBS AG’s U.S. wealth-management has been ordered to pay a Puerto Rican retiree $1 million in compensation for unrealized losses in the island’s municipal-bond funds.

A Financial Industry Regulatory Authority arbitration panel ruled that the closed-end bond funds UBS brokers recommended for their client Juan Burgos were unsuitable.

Mr. Burgos was 66 years old when he invested in the funds that were popular on the island because of their favorable tax status. He had no experience in buying securities.