The municipal bond market is a popular piece of many retirement portfolios, but it is riskier than many retirees suppose.
Municipal bonds are bonds issued by local governmental entities. They could be cities, development authorities, utility improvement districts, school districts, or fire departments. Municipalities like to issue these bonds because they provide upfront cash for big projects than can be repaid over time. Investors like them because the income from these bonds is often not subject to income tax. Additionally—while individual bonds might default—the municipal bond asset class usually has a low likelihood of default.
However, and this is important, individual bonds can default. This is especially dangerous for investors who buy individual bonds instead of a bond fund, and there are a lot of investors out there who do just that.
One of the ways bond underwriters help bond investors understand the risk is by keeping track of both the bond and the issuing municipality. This is more than just a nice service; it’s the law (Rule 15c2-12 of Securities Exchange Act of 1934, for those who enjoy reading securities regulations).
This law is routinely violated.
As a result, investors might not get as much warning (or any warning) when an issuer is about to default. They might also be buying municipal bonds issued by municipalities that are on a shaky financial footing.
This misconduct is so widespread that the SEC recently started an initiative to encourage municipal bond underwriters to self-report their misconduct in exchange for lenient settlement terms. And, boy, did underwriters line up! Under this initiative, the MCDC or Municipalities Continuing Disclosure Cooperation Initiative (can the SEC come up with catchy titles or what?), the maximum fine was $500,000. Here’s the list of firms who paid the maximum fine:
Citigroup Global Markets Goldman Sachs
J.P. Morgan Securities Merrill Lynch
Morgan Stanley Piper Jaffray
PNC Capital Markets Raymond James
RBC Capital Markets Robert W. Baird & Co.
On top of that, here is a list of the additional firms that have come forward so far and how much they paid in fines under the MCDC Initiative:
Ameritas – $200,000 The Baker Group – $250,000
BB&T Securities – $200,000 B.C. Ziegler and Company – $250,000
Benchmark Securities – $100,000 Bernardi Securities – $100,000
BMO Capital Markets – $250,000 BNY Mellon – $120,000
BOSC – $250,000 Central States Capital Markets – $60,000
City Securities Corp. – $250,000 Commerce Bank – $40,000
County Club Bank – $140,000 Crews & Associates – $250,000
Davenport & Company – $80,000 Dougherty & Co. – $250,000
Duncan-Williams – $250,000 Edward Jones – $100,000
Estrada Hinojosa & Co. – $40,000 Fifth Third Securities – $20,000
First National Capital Markets – $100,000 Frazier Lanier Co. – $100,000
George K. Baum & Co. – $250,000 Hutchinson Shockey – $220,000
J.J.B. Hilliard – $420,000 Joe Jolly & Co. – $100,000
L.J. Hart & Co. – $100,000 Loop Capital Markets – $60,000
Martin Nelson & Co. – $100,000 Merchant Capital – $100,000
Mesirow Financial – $100,000 Northern Trust Co. – $60,000
Northland Securities – $220,000 NW Capital Markets – $100,000
Oppenheimer – $400,000 Prager & Co. – $100,000
Ross, Sinclaire & Associates – $220,000 Siebert Bradford – $240,000
Smith Hayes – $40,000 Stephens, Inc. – $400,000
UMB Bank – $420,000 U.S. Bank – $60,000
Wells Nelson – $100,000 William Blair & Co. – $80,000
While these fines are even less than a slap on the wrist to these financial titans, the SEC is confident that its initiative will lead to a better municipal bond market. Are you?
If you have been blindsided by losses in municipal bonds, the investment fraud attorneys at Investor Defense Law LLP may be able to help you recover your losses.
Investor Defense Law LLP is a law firm dedicated to helping investors in CA, GA and WA recover losses caused by stockbrokers, financial advisors, or investment firms. To learn more, contact an investment fraud attorney at 800.487.4660.