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Local Governments' Fiduciary Duties to Bondholders
Monday, September 1st, 2008
Robert Wechsler
Local governments may only be accountable to their citizens, but they also have
fiduciary duties to those who invest in their
bonds.
Many local governments don't act like they do, however." In Gretchen Morgenson's column in yesterday's New York Times, she cites a study by DPC Data, 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.
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."
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.
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.
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?
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).
Robert Wechsler
Director of Research-Retired, City Ethics
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Many local governments don't act like they do, however." In Gretchen Morgenson's column in yesterday's New York Times, she cites a study by DPC Data, 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.
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."
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.
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.
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?
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).
Robert Wechsler
Director of Research-Retired, City Ethics
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