Retail investors make up three-fourth's of muni bond buyers, but do they get enough information. Find out what the SEC has to say.
Recommendations for greater transparency for municipal bond investors have been issued by the U.S. Securities and Exchange Commission in a report released just days before the California city of San Bernadino became the state’s latest municipality to file for bankruptcy.
San Bernadino, with a population of 209,000, on Wednesday joined Stockton and Mammoth Lakes, as the three California cities filing for Chapter 9 bankruptcy this summer. Billionaire investor Warren Buffett perceived the Stockton event as removing “the stigma” from municipal bankruptcy and predicted many more local governments would follow suit.
Growing concerns over disclosures made to municipal bond investors prompted the SEC to launch a study in mid-2010 into ways to increase the transparency of the $3.7 trillion municipal securities market. According to the SEC, three-fourths of these securities are held by individual “retail” investors.
“The municipal securities market is the bedrock for funding of local government projects throughout our country,” said Mary L. Schapiro, chair of the SEC, said in a statement released Tuesday to announce its findings. “It is essential that the market work well and that investors have confidence in it.”
The SEC, which has limited authority to regulate municipal bond offerings, calls upon Congress to take steps to improve the information provided to municipal bond investors. For one, the agency has asked Congress to grant the SEC authority to require local governments issuing bonds to have audited financial statements. The SEC has also requested the authority to set baseline standards for disclosures provided investors. A full copy of the report is available from the SEC.
Affluent investors traditionally use municipal bonds to preserve capital and shelter income from taxes, since income from municipal bonds is federally tax-exempt and investors typically receive back their initial investment when the bond matures – unless, of course, a municipality should default. Learn more about the risksfacing municipal bonds investors.