SEC Pushes For More Disclosure To Investors

The Securities and Exchange Commission yesterday proposed new rules to require local governments issuing municipal bonds, which are used to fund hospitals, roads and schools, to give investors new information about key risks and developments affecting their investments.

The municipal bond market, valued at more than $2 trillion, is a popular destination for investors because the returns are often tax-free. More than 70 percent of municipal bonds are owned by individual investors, either directly or through funds.

But these bonds are largely exempt from SEC oversight, which means issuers don't have to provide the same disclosure as with other types of fixed-income investments, such as corporate bonds.

While the SEC requires that brokers that sell municipal bonds meet certain disclosure requirements, what is reported is often decided on a case-by-case basis. For example, it's up to local governments to decide whether to tell investors if the tax-free status of a municipal bond is under review by the IRS. Also, investors need only be told in a "timely manner," which is undefined.

The SEC's proposals seek to change both of these things. The proposals would require that an issuer of a municipal bond tell investors about any potential changes to tax status and several measures that indicate the financial health of the issuer and its ability to pay back investors.

The proposals would require this disclosure within 10 days.

In addition, a class of municipal bonds with varying interest rates would be subject to disclosures. Until now, they haven't been. These variable-rate bonds have been increasingly popular with governments and now account for 38 percent of all municipal bonds.

"These ongoing disclosures about municipal securities are intended to enable investors to better monitor their investments, avoid manipulation and detect potential frauds," SEC Chairman Mary L. Schapiro said in a statement.