According to reports, the Financial Industry Regulatory Authority’s municipal market priority this year will be to ensure that brokers/financial advisors adequately disclose the risks associated with tax-exempt bonds backed by revenue from private and nonprofit entities. These bonds have significantly higher default rates than general obligation bonds.
FINRA’s 2013 regulatory and examination priority report, released in January, noted that not all municipal bonds have equal security, and that brokers sometimes fail to tell customers about the risks associated with certain types of bonds.
Disclosure was also the focus of FINRA’s 2012 priorities report, which called for better access by market participants to timely and accurate disclosures from issuers.
The 2013 report said general obligation bonds have historical default rates of about 0.1%, but that default rates for “sectors dependent on private profit-making or nonprofit performance” have been significantly higher.
FINRA cited a May 2012 report in which Robert Doty, a Sacramento, Calif.-based municipal advisor and president of consulting firm AGFS, said some of those bonds can default at rates hundreds or thousands of times higher than general obligation bonds.
Doty’s report, which pulled data from Municipal Market Advisors and other sources, said default rates have been as high as 16.56% for private community-development district bonds, 3.97% for nursing home bonds, 4.48% for assisted-living facility bonds, 1.62% for local multifamily housing bonds and 0.99% for economic and industrial development bonds.
Conduit bonds have also been of concern to the Securities and Exchange Commission, which recommended in its July 2012 report on the muni market that Congress remove exemptions in the Securities Act of 1933 for corporate borrowers of conduit muni bonds so that they become subject to corporate-style registration and disclosure requirements.
With the risks of bonds not being equal, the overriding concern is that financial advisors would misrepresent the risks of these bonds to their clients’ detriment.
The foregoing information has been provided by The White Law Group, a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.
For more information on the firm, visit http://www.whitesecuritieslaw.com.