Regulators are clamping down on municipal bond isssuers related to political contributions they or their employees have made in states where they have underwritten bonds
Regulators are clamping down on municipal bond isssuers related to political contributions they or their employees have made in states where they have underwritten bonds.
This month, the Securities and Exchange Commission subpoenaed documents from the Massachusetts state treasurer's office, looking into ties between former Treasurer Timothy Cahill and his former staff members and aides, and The Goldman Sachs Group Inc.
As first reported in The Boston Globe, the Massachusetts state treasurer's office received the SEC subpoena one month after Goldman removed itself from two state bond deals because a vice president at the firm, Neil Morrison, had worked on Mr. Cahill's campaign for governor.
Under Municipal Securities Rulemaking Board regulations, broker-dealers or muni securities dealers can't engage in muni securities business with an issuer for two years after any contribution made by the firm or an individual associated with the firm. According to the Financial Industry Regulatory Authority Inc.'s BrokerCheck, Mr. Morrison was let go by Goldman Dec. 19 over “allegations involving outside activity without pre-approval.”
Spokesmen for the SEC and Goldman declined to comment.
Also this month, Finra sent members of the California Public Securities Association, a lobbying group for the muni bond industry, a letter asking about payments made by its members to political action committees that made donations to groups fighting or backing ballot initiatives, according to reports.
The association is working with its members who received the Finra letter to respond to its requests, said its chairman, James Cervantes, a managing director at bond underwriter Stone & Youngberg LLC.
Nancy Condon, a Finra spokeswoman, declined to comment.
Meanwhile, the muni bond market has been hit with mass redemptions over fears of widespread defaults.
WHITNEY'S PREDICTION
Last month, Meredith Whitney, a bank analyst who predicted the credit market crash, forecast 50 to 100 “significant muni bond defaults this year.” In December, investors pulled nearly $13.4 billion out of muni bond funds.
Regulators may be paying closer attention to muni bond conflict-of-interest issues now because of the volatility and also because more retail investors own muni bonds than ever before, said Robert Kane, founder of BondView LLC, which operates a website for muni bond investors.
“Before 2008, it was mostly the big firms and hedge funds that owned municipal bonds,” he said, “but now 70% of the municipal bond market is owned by retail investors. These products are top-of-mind.”
And though the conflict-of-interest issues have nothing to do with the volatility in the muni bond market, it is possible that the continuing bad press has caused regulators to take a closer look, said John Mousseau, a managing director and portfolio manager at Cumberland Advisors Inc.
“Not to say that where there is smoke, there is fire, but this kind of turmoil may have caused the SEC to look at this,” he said.
The SEC and Finra examinations come just a few weeks after the MSRB proposed extending the rule on political contributions to all advisers of municipalities.
“This will include traditional financial advisers who work with issuers,” said Ernesto Lanza, general counsel at the MSRB.
The proposal is up for comment until Feb. 22.
Some advisers welcome the increased focus from regulators on conflict-of-interest issues.
“This industry has been fraught with conflicts for years,” said Marilyn Cohen, president and chief executive of Envision Capital Management Inc. “Conflicts could mean that these deals are getting done by guys who aren't the smartest in the room.”
E-mail Jessica Toonkel at jtoonkel@investmentnews.com.
