FINRA Reviews Municipal Bond Securities

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The Financial Industry Regulatory Authority (FINRA) announced Tuesday that it was conducting sweeps of firms involved in several recent municipal bond collapses with a possibility of future investigations and possible disciplinary actions.

FINRA is seeking information from financial firms involved in several recent financial market problems.   Firms that underwrote securities tied to derivatives that were sold to municipalities and those that sold so-called municipal gas bonds that were guaranteed by the defunct Lehman Brothers and are now distressed securities.

The sweeps are part of a new scrutiny of the $2.7 trillion municipal bond market, which has been shaken by a rise in defaults and increased pressure from a weakened economy. FINRA will be looking at a broad range of practices, including interactions with retail investors, and will collect data on sales, marketing, pricing, disclosure and consumer complaints.

FINRA is taking concerted action to ensure that investors are aware of both the risks and the benefits that might be associated with a municipal bond investment.   Highly complex instruments like derivatives were often marketed to municipalities as a way to lower their borrowing costs through variable rate securities. But in many cases, these securities have had the opposite effect.     

One case involves Jefferson County, Ala., which now faces bankruptcy after its interest on $3 billion of adjustable rate debt, rather than being lowered, rose to 10 percent.  In the case of the gas bonds, FINRA is seeking information from firms that sold the bonds to retail investors. The bonds were underwritten and guaranteed by Lehman Brothers, and quickly lost value when they, too, became distressed securities.

Anna Timone (195 Posts)

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