The quality and timeliness of information that state and local governments are disclosing about their finances is becoming a growing concern for both investors and regulators. The Securities and Exchange Commission (SEC) is searching for cases in which municipalities failed to warn investors of fiscal problems. Recently, the SEC brought a case against New Jersey, claiming that the state failed to give bond investors a full picture of its large pension obligations.
Investors’ concerns over the adequacy of disclosures may be partially responsible for investors withdrawal of more than $20 billion from municipal bond funds in recent weeks as weak disclosure may be raising anxiety in the $2.9 trillion market.
Although federal regulators’ power in this area is limited as municipal borrowers are unregulated, regulators are trying to crack down on the disclosure issue. Elaine Greenberg, who runs the municipal-bond unit set up by the SEC last year 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.”
A specialist in municipal disclosure, at the request of The Wall Street Journal, did an extensive analysis of municipal disclosures and found that more than 56% of 17,000 bond issues it studied filed no financial statements in any given year between 2005 and 2009. The study noted that more than one-third of issuers entirely skipped three or more years, and the number grew to 40% in 2009, as credit woes mounted while another 30% filed extraordinarily late in 2009.
The absence of meaningful disclosure has resulted in investors getting caught off guard by bad news when governments and other borrowers struggle. For example, Clay County, Tennessee’s Clay Gas and Utility District didn’t file disclosures for 10 years before announcing, last November, that it didn’t expect to make future payments. Similarly, earlier this month, the city of Chowchilla, California defaulted on its bonds used to renovate city hall even though it never filed documents suggesting to investors that a default might be coming.
General media reports about city and state fiscal woes aren’t adequate notice of a particular issuer’s woes. Ms. Greenberg noted that specific issuer information has to be filed with the Municipal Securities Rulemaking Board, a self-regulatory organization that posts the information on a publicly accessible website called EMMA.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.