Local Governments' Fiduciary Duties to Bondholders
Local governments may only be accountable to their citizens, but they also have
fiduciary duties to those who invest in their
bonds.<br>
<br>
Many local governments don't act like they do, however." In <a href="http://www.nytimes.com/2008/08/31/business/31gret.html" target="”_blank”">Gretchen
Morgenson's column</a> in yesterday's New York <span>Times</span>, she cites <a href="http://www.dpcdata.com/html/about-researchpapers.html" target="”_blank”">a study
by DPC Data</a>, one of the four nationally recognized municipal
securities information repositories, which found that with respect to
more than 50% of all muni bonds, the issuer failed on one or more
occasion to file the required financial statements. And 25% of the
time, the delinquency was chronic, defined as missing three or more
years of disclosures.<br>
<br>
One reason given is that nothing happens to local governments that
don't file on time. The SEC only regulates brokerage firms that
underwrite the bonds: they can't issue new bonds unless the filings are
up to date. That's why "it is common to see years' worth of filings
emerge from an issue all at once [when] the municipality wants to raise
money through a new debt issue."<br>
<br>
In short, without regulation, many local governments are not fulfilling
their fiduciary duties. Without the SEC requirement on brokerage firms,
the situation would be much worse.<br>
<br>
Is it time for local governments to regulate themselves, at least? An
ethics code could require that these disclosures be made, with
enforcement against the official responsible for the filing. It doesn't
sound like the right place for such a rule, but as long as the
requirements are made public, and notice of each filing is made with
the ethics commission, it's a very easy call for the commission. And it
does involve a fiduciary duty similar to that owed to citizens.<br>
<br>
There is one principal difference. Here the conflict (barring
incompetence or officials trying to hide negative information from their taxpayers, as well) is between the interests of the government's taxpayers
and the interests of the holders of the bonds. If things aren't going
well, it could mean a ratings downgrade. That would mean higher
interest rates to be paid by taxpayers. But does protecting taxpayers'
interests allow a local government to jeopardize the interests of
bondholders?<br>
<br>
No, the filings should be made on a timely basis, not only for the
bondholders' sake, but also so that taxpayers can know the state of
their local government, as well (assuming the filings are public and
that someone in the media or interested citizens can interpret them).<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>
<br>
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