Investors in the $2.9 trillion municipal bond market are becoming increasingly
anxious – and angry – over delayed financial disclosures,
according to an article by
The Wall Street Journal (“Bondholders Left in the Dark,” Jan. 26, 2010). In 2010,
individual investors owned at least 70 percent of the municipal securities
market. Now, many of those investors are worried about the financial health
of the U.S.’s state and local governments.
As reported in the article, a recent analysis conducted by DPC DATA Inc.,
a specialist in municipal disclosure, found that at least a third of the
17,000 bonds studied failed to file financial statements in three out
of five years. And, the percentage of non-filers appears to be growing
alongside the increase in government credit and financial problems. Peter
Schmitt, chief executive of DPC, told the
WSJ: “This works out to insufficient ongoing disclosure information
for more than $2 trillion of the $3 trillion in outstanding bonds.”
Last year, Arthur Levitt, SEC Chairman from 1993 to 2001, toldBloomberg News that enforcement of the municipal securities market "was terribly
neglected in recent years" and that municipal fraud and incompetence
“has never been greater.” (“Can the SEC Get Its Street
Bloomberg News, April 1, 2010) Now, to help protect investors, the SEC is increasing
its scrutiny over the largely unregulated market.
In 2010, the SEC set up a new municipal-bond enforcement unit, headed by
Elaine Greenberg. Greenberg believes the lack of disclosure is a problem
for investors, particularly when financial problems tend to mean municipalities
disclose less information later – information that investors need now.
WSJ article, Greenberg was quoted as having said: “If a municipality
is in dire financial straits, we want to know if that information was
disclosed to bond holders in a timely fashion. It's not good enough
to put the information out there late. Investors need information that
is current, not stale, to make informed investment decisions."
To address the problem, the new SEC unit is investigating cases where municipalities
allegedly failed to disclose their financial problems to bond holders.
New Jersey authorities recently settled such a case, and Illinois is currently
facing an inquiry about public statements authorities made about its pension
funds, according to the
Additional inquiries into other municipalities are expected.