We were pleased to be invited to a compliance seminar held for various brokerage firm CEOs, hosted by Rick Ketchum, the new chairman and chief executive officer of the Financial Industry Regulatory Authority (FINRA).
FINRA, the successor to the National Association of Securities Dealers (NASD), is the largest independent regulator for securities firms doing business in the United States.
In the wake of the financial meltdown of the past 12 months, Mr. Ketchum is actively engaged in a fact-finding mission throughout the country, seeking opinions from industry leaders on methods to strengthen investor protection and market integrity through more effective and efficient regulations and enforcement.
We were quite impressed with his approach, knowledge and initial efforts toward these ends.
As a municipal bond specialist firm, we have a vested interest in supporting any activities that contribute to making the $2.8 trillion municipal bond market more transparent and user friendly for individual investors.
Notable progress in investor protection
Important strides are being made in the area of municipal issuer disclosure, which has historically proven to be a black hole for investors and bond dealers seeking to assess the ongoing financial condition of municipal issuers.
The Municipal Securities Rulemaking Board (MSRB) has established a Web site to provide up-to-date financial filings for the majority of outstanding tax-free bond issues. This site, known as Electronic Municipal Market Access (EMMA), enables investors to review the official statements of the bonds they hold, and avail themselves of e-mail alerts to notify them of material financial developments for specific issues.
SEC also weighs in
Mary Schapiro, the new chairperson of the Securities and Exchange Commission (SEC), has also pledged to beef up oversight in the tax-free bond market. To this end, the SEC proposed a new regulation that would require issuers to disclose any major financial developments to EMMA in a timely manner (within 10 business days).
More important, under this new rule, it would no longer be up to the issuer to determine if a development in its fiscal condition is significant. The issuer will be responsible to report all events, such as an interruption in debt service payments or the tapping of reserves to meet these obligations.
Perfect timing
These oversight initiatives could not be coming at a better time.
Investor confidence has been seriously shaken by the catastrophic events on Wall Street, starting in September 2008 with the collapse of Lehman Brothers, Inc., a venerable 158-year old investment banking firm.
Investors witnessed the demise of Washington Mutual, the largest savings bank in the country, as well as the government takeover of Fannie Mae and Freddie Mac. They watched in horror as the largest brokerage firm in the world, Merrill Lynch, ceased to exist as an independent company, while almost every major brokerage and banking institution required government assistance to stay afloat; this as a result of their own misguided investments.
Dawning of a new era
If there is one positive byproduct of this crisis, we hope it is investors’ realization that they need to take responsibility for their own financial well being. They no longer have reason to believe that any brokerage firm is likely to take better care of their money than it did its own.
As we have continually noted, investors have been flocking to municipal bonds in record numbers. They are not only snapping up individual bonds, but are pouring billions of dollars into tax-exempt bond funds.
Many have concluded that although the market value of their municipal bond holdings also declined during the crisis, investors continued to receive their timely payments of tax-free interest, in stark contrast to once-reliable dividends being cut by almost every major corporation.
The appeal of municipals has also been enhanced by the dramatic recovery in bond market values over the past six months.
Proceed with caution
Notwithstanding these positive developments in the municipal bond market, investors have more reason than ever to do their homework. Over the past 30 years, most bond buyers and their brokers depended on municipal bond insurance to create the impression that, if a bond was insured, its underlying security need not be part of the conversation.
With the decimation of the bond insurers, this is no longer the case. Today, the ability to research a bond issue and have the necessary financial disclosure documents available has never been more important.
It may seem self-serving, but it is crystal clear that investors should seek out a bond specialist to provide the vital research required to make intelligent investment decisions. At FMSbonds, we list hundreds of official statements on our Web site, which can be accessed by CUSIP number. If we are missing one that you need, ask us and we will get it for you.
Our No. 1 priority is providing the information you need to feel comfortable with your bond purchases and holdings.