Muniland has a disclosure problem
There is a glaring gap in regulation – called Regulation Fair Disclosure – when it comes to protecting municipal bond investors. It appears that issuers may be in the habit of giving material nonpublic information to preferred institutional investors, while making retail and non-preferred investors sit out in the cold. Exhibit number one is the treatment of media members who have petitioned to attend the City of Philadelphia bond investor day scheduled for this Thursday. The Philadelphia Inquirer wrote:
Several news organizations led by Bloomberg News are protesting the exclusion of the news media from a two-day conference sponsored by the Nutter administration to stimulate investor interest in the city’s municipal bonds.
The Inquirer has joined the protest, signing a letter to Nutter that criticizes the city for refusing to let reporters attend the conference, scheduled to begin Thursday at the Comcast Center.
“In our view, when the City of Philadelphia speaks to investors about the issuance of public bonds and the city’s fiscal condition, that’s important public business,” Inquirer editor William K. Marimow said.
The Associated Press and the Reporters Committee for Freedom of the Press also signed the letter to Nutter.
The Inquirer’s editor, William Marimow, said that the issuance of new bonds is public business. But what about all the retail investors who own Philly bonds? Retail investors own about 50 percent of municipal bonds directly and another 20 percent through mutual funds. If the media is not allowed to attend the conference, then retail is at a distinct disadvantage. Retail, with no access to current information, has to rely on the most recent official information released by Philadelphia, which was the city’s Comprehensive Annual Financial Review for the year ended 06/30/2012 (2.2 MB). If a retail investor does not attend the conference or get any information from media, her information is about ten months old. A lot can happen in muniland in ten months these days.
The Tenth Amendment has made Congress hesitant to stray into states’ rights over disclosure for municipal issuers. Congress essentially shut the SEC and MSRB down from having any oversight with the 1975 passage of the Tower Amendment. The SEC has not asked Congress to repeal Tower, and with little disclosure in muniland, it’s again retail investors who take the brunt of having little or outdated information.
The Commonwealth of Puerto Rico, which is in disastrous fiscal shape, also recently held a private institutional investor meeting in New York City. The WSJ reported (emphasis mine):
Senior members of Puerto Rico’s new fiscal team plan to meet with select municipal-bond buyers in New York next Friday, as they seek to allay investor concerns following the commonwealth’s two downgrades to near-“junk” status.
Dribbling out information to select bond investors is a terrible way of building a broad base of support for a municipal issue. All investors want transparency. When they don’t get it they will pass on buying a bond or demand a lower price and higher yield.
Philadelphia has been skewered by the press. Bloomberg reported:
In Philadelphia, where more than a quarter of the population of 1.5 million lives in poverty, there’s “insufficient documentation” to determine the reasons for entering into its $3.5 billion of swaps, Treasurer Nancy Winkler told the City Council in October.
My guess is that issuers like Philadelphia and Puerto Rico are afraid of what enterprising reporters and bloggers can unearth about how they manage their public finances. But it’s the people’s finances. When you do it in dark places, sloppy things like “insufficient documentation” seem to happen. Open up to all investors and show muniland that you have nothing to hide.