You are responsible for your bond issues.
That was the subject of a speech Paul S. Maco, the first director of the Securities and Exchange Commission’s Office of Municipal Securities, used to give more than a decade ago. The speech was aimed at public officials, and was an earnest reminder of their duties to investors when they tapped the municipal market.
I always liked that speech. It looks like New Jersey officials never heard it.
Yesterday, New Jersey became the first state ever accused by the SEC of violating federal securities laws. Between 2001 and 2007 and not very long after Maco gave that speech for the last time -- he joined Vinson & Elkins in Washington in 2000 -- the state failed to tell investors that it was underfunding its pension plans.
In 79 bond issues totaling more than $26 billion, the state misrepresented what was really going on behind the scenes, the SEC said in its cease-and-desist order. Offering documents to bond issues are called official statements. Here’s what the SEC said in its complaint against the state:
“The Treasurers did not read official statements, and relied on their staff to ensure the accuracy of the information contained in the documents,” the SEC said. “Treasury had no written policies or procedures relating to the review or update of the bond offering documents.”
That doesn’t sound very responsible, does it? How does that make you feel, if you are a bond investor? You’ve been had.
There was a lot going on behind the scenes, it turns out, a lot of game-playing. New Jersey bond buyers wouldn’t have known it. They might have suspected it, but it wouldn’t have been obvious in the documentation.
And how did this end? In April 2007, the New York Times carried an article headlined “New Jersey Diverts Billions, Endangering Pension Fund.” Only after that article was published did the state hire counsel and “enhance its disclosures,” as the SEC put it.
That seems to be why the state got off lightly in settling the SEC’s allegations, neither admitting nor denying, as the saying goes, nor paying any penalty beyond saying it will cease and desist committing securities fraud.
Don’t Do This
This is the first enforcement action to be taken by the SEC’s Municipal Securities and Public Pensions Unit. The unit’s chief, Elaine C. Greenberg, told me yesterday in an interview that she hoped other municipal bond issuers would “take notice” of the action, and adjust their procedures accordingly.
Greenberg wouldn’t say if any other actions were on the horizon, but judging from the disastrous condition of so many public pension plans, you would have to think so.
And hope so. Because the $2.8 trillion municipal market, after years of relative slumber, desperately needs someone to say, “See this? Don’t do this.” And not just once, either.
For years, I’ve heard all about how one of the main things blocking effective regulation of the municipal market was the Tower amendment.
Tower was added to the Securities Exchange Act of 1934 in 1975, when Congress created the Municipal Securities Rulemaking Board to oversee the market. The amendment says that neither the SEC nor the MSRB can require municipal issuers to file documents before they sell bonds. They are exempt from registration.
What it’s been taken to mean is that the SEC doesn’t regulate municipal issuers.
But you know what? You don’t need to repeal Tower. As Greenberg pointed out to me, “Our mandate is investor protection.” States and municipalities can’t defraud investors with impunity.
I always liked Maco’s speech. I liked it because public officials find it very easy to blame the bankers, brokers, lawyers and advisers they hire to help them sell bonds when something goes wrong. New Jersey just found out otherwise.
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Joe Mysak in New York at firstname.lastname@example.org