SEC Takes a Closer Look at Municipal Bonds

The US Securities and Exchange Commission is finally beginning to scrutinize municipal bond issuers. Recent efforts include the opening of investigations into whether certain municipalities misled investors about their financial well-being before they made their bonds available to them.

The SEC’s municipal-bond enforcement unit is searching for occurrences involving “tension” involving “disclosures and the subsequent announcements” by municipal issuers of financial problems. The regulator is a telling underwriter and issuers that they will be subject the less harsh penalties if they choose to self-report violations rather than waiting for an enforcement action.

The $3.7 trillion muni bond industry is essential for not just local governments but also for investors. Retail investors, especially senior investors, have long looked to muni bonds for tax-free income.

However, investor confidence hasn’t been as solid in recent years in the wake of the financial crisis of 2008 as well as the financial problems facing Jefferson County, Ala., Stockton, Ca., and Detroit, Michigan, which all filed for bankruptcy protection. Then, of course, there are the Puerto Rico bond losses sustained by hundreds of investors that are now the subject of numerous municipal bond fraud claims.

Last month, The Wall Street Journal reported that according to a new study released by the S&P Dow Jones Indices, there is a hidden 1.73% transaction cost included in muni-bond markups. Also, the Municipal Securities Rulemaking Board is trying to push for more transparency from the industry with a rule that would mandate that muni securities dealers obtain the best execution prices for retail investors. The deadline for public comments on the proposed rule was March 21.

The latest SEC investigations are part of the regulators efforts to clamp down on the industry. Last year, it filed securities charges against the city of Harrisburg, Pennsylvania for putting out public statements that were misleading even as its financial health was getting worse. Municipal bond investors were purportedly given dated or incomplete financial data.

The SEC also sued an Indiana school district and its underwriter for purportedly lying about financial data, including failing to submit required reports and notices for a 2005 bond issue and saying it had complied with disclosure obligations in a 2007 bond sale. The SEC says that the underwriter, City Securities Corporation, failed to make sure that the district did in fact comply.

In a 2013 investor alert, the Financial Industry Regulatory Authority reminded investors that munis, as with all bond investments, come with risks, including:

• Defaults
• Data about financial woes impacting the issuer of the bond may not always be available to investors
• A muni bond’s market value may be hard to asses because they don’t trade often
• The market value of the bond may change for reasons unrelated to the issuer’s financial state

Your broker or investment adviser should apprise you of the risks and make sure that you understand what you are getting involved in. They should also make sure that the investment is suitable for you, your goals, and your portfolio and is in your best interests.

Muni regulator pursues rule to increase price transparency, InvestmentNews, March 12, 2014

Indiana school district, bond underwriter charged with fraud -SEC, Reuters, July 29, 2013

SEC Charges City of Harrisburg for Fraudulent Public Statements, SEC, May 6, 2013

More Blog Posts:
FINRA Doesn’t Want Oversight Over Financial Advisers, Says CEO Ketchum, Stockbroker Fraud Blog, April 12, 2014

Large Hedge Funds Invested in Puerto Rico Bonds, Stockbroker Fraud Blog, April 11, 2014

Muni Bond Investors Pay Twice More In Commissions than When Investing in Corporate Bonds, Reports The Journal, Institutional Investor Securities Blog, March 10, 2014

SEC Says At Least 200 Private-Equity Firms Have Imposed Bogus Fees, Institutional Investor Securities Blog, April 9, 2014