DPC DATA finds hundreds of 'questionable' muni trades in 2008, links them to lack of oversight

By Angela McDaniels

Tacoma, Wash., Feb. 23 - DPC DATA Inc. reviewed trade data from the Municipal Securities Rulemaking Board and found hundreds of trades in municipal bonds in 2008 that are "questionable in terms of meeting regulatory standards for investor protection" set out by the MSRB and the Securities and Exchange Commission, according to a company news release.

DPC DATA said that to identify the suspect trades, it matched trade data with officially filed disclosures, focusing on material event notices that typically indicate distressed bonds. These notices were payment delinquencies, non-payment-related defaults, unscheduled draws on debt service reserves and unscheduled draws on credit enhancements.

The company said that its research report, titled "The Consequences of Poor Disclosure Enforcement in the Municipal Securities Market," included these findings:

• In 2008, 667 dealer-to-customer sales were executed at par or higher after a default or other stress notice was filed by the issuer in the official disclosure system, "suggesting possible failure by dealers to ensure suitability or fair pricing in the trades";

• The majority of these trades occurred during September through November, "when credit markets were imploding";

• In half of these sales, "there was no way for investors to protect themselves" with independent research because no financial statements had been made publicly available in the official disclosure system during 2007 or 2008;

• More than 40% of the trades were in par amounts of $50,000 or less, "suggesting they were sales to retail (rather than institutional) buyers"; and

• Both default-related notices and sales of apparently distressed bonds to investors "jumped dramatically" in 2008 over previous years.

Implications

"The implications of this study are twofold, and both bode ill for the municipal investor unless significant improvements are made in regulatory oversight and enforcement," Peter J. Schmitt, DPC Data chief executive officer and author of the study, said in the release.

"First, the traditional low default rates of municipal bonds as investments can no longer be assumed. The rise in distress notices indicate that issuers and obligors are suffering from the same financial stresses as the rest of the market. Until the economy recovers, this increase in distressed issues is likely to be a continuing trend.

"A second implication arising from this study is that the failure of the SEC and the MSRB to address the massive rate of non-disclosure by issuers and obligors, identified in our last study, is now quite possibly contributing to the growth of apparently predatory trades."

Schmitt said the study questions the safety of "leaving the only mechanism of disclosure-related investor protections in the hands of a self-regulating industry body," the MSRB, and added that DPC Data hopes "the implications of this study are considered carefully by lawmakers and regulators."

DPC DATA is a Fort Lee, N.J.-based provider of municipal bond disclosure data. Its report is available at www.DPCDATA.com.

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