March 22, 2011
The Bond Buyer suggested that the SEC might be interested in my concerns about the municipal market.
My firm is a registered investment advisor and I represent clients in the bonds markets. Here are some thoughts I have about issues that concern me.
Derivatives: My concern is that large, experienced brokerage firms are able to sell municipal entities derivatives without the actual buyers having the proper training or expertise in the field. As a purchaser of municipal bonds, I fear that a seemingly safe issuer may have entered a black hole by purchasing derivatives that risk their ability to repay their bonds. There is no way that I can know if they have done or will do this. There should be some way that the issuers of bonds have transparency in their derivative purchases, and some required oversight and training if they wish to purchase derivatives.
Disclosure: It should state in the prospectus if they plan to comply with regular disclosure practices. There should be a penalty, probably noted by the rating agencies, if they state they will and then they do not comply, or they state that they will not comply. It is very important to a strong market that access to disclosure is clearly available.
Bond Insurance and Default: When there was solvent bond insurers, there was always the hope that if there was a pending default, the bond insurer acted on its own behalf and therefore on behalf of the individual investor because their needs were aligned. Without bond insurance, the individual investor has no champion. It would be useful if there was a way that individuals who had invested in a troubled issue could organize to gain proper representation. Is there a requirement that a trustee be appointed in the event of a payment problem? If there is a requirement, it would be good if there was a public source of information of who the trustees are.
These are thoughts that come quickly to mind. Thank you for reaching out and trying to improve the market.