Tax-free bond buyers in the dark, Cox says
Investors who buy tax-free municipal bonds don’t get all the information they need to evaluate the risk of the securities, Securities and Exchange Commission Chairman Christopher Cox said Wednesday in Los Angeles. He called on Congress to remedy the situation.
Treading on politically sensitive turf, Cox said that cities, states and other municipal entities should provide better disclosure of their finances, akin to requirements faced by publicly traded companies.
Investors who own $2.4 trillion of municipal securities now get “second-class treatment” in terms of disclosure compared with what they are told about corporate securities, Cox said at a meeting of the Town Hall Los Angeles civic group.
The SEC chief chose California, his home state, to launch what could become a heated battle with states and cities on the issue of financial oversight.
The Government Finance Officers Assn., a group of 17,300 state and local finance officials, quickly rejected Cox’s view.
“I think he’s putting forth a solution that’s looking for a problem,” said Jeffrey Esser, executive director of the group.
Since 1975, federal law has expressly exempted municipal entities from financial oversight by the SEC, except when securities fraud is exposed.
But Cox said the law was outdated and was putting municipal bond investors at risk -- in particular, individual investors who directly own 36% of all municipal securities, he said.
Cox cited the case of the city of San Diego, which has faced a financial crisis in recent years tied to workers’ pension costs. The city last year was sanctioned by the SEC for allegedly committing fraud by failing to disclose to investors key details about its future pension and retiree healthcare obligations in the sale of municipal bonds in 2002-03.
Holding municipalities to financial disclosure standards similar to what companies face amounts to “basic common-sense consumer protection that is way overdue,” Cox said.
Corporate executives, Cox noted, must sign their names attesting to the accuracy of financial statements given to investors. By contrast, he said, “There is simply inadequate participation by public officials in the preparation of offering disclosures” for municipal securities.
Cox, an Orange County Republican congressman until President Bush named him SEC chief in 2005, said he wasn’t proposing that Congress give the agency the power to review all financial-disclosure documents of municipal bond issuers, which total about 50,000 nationwide.
Instead, Cox called for “limited regulation” that could give investors “information similar to what they’re accustomed to seeing for all of the other securities they own.”
Esser, however, said investors already could easily gain access to state and city budget details and other financial data. “There is more transparency in the government sector than there is in the corporate sector,” he said.
Wall Street, which earns large fees arranging and selling municipal bonds, also is wary of Cox’s call for more regulation.
Historically, serious bond troubles among municipal issuers have been rarities, said Marc Lackritz, chief of the Securities Industry and Financial Markets Assn., which represents stock and bond brokerages.
The municipal bond market “has been a success story,” he said. “We should be real careful about tampering with it.”
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