SAN FRANCISCO — The municipal bond market does a poor job providing retail buyers with necessary information, a worse job providing them with continuing disclosure about their investments, and is an awful place to sell those investments.
Those were some of the observations three municipal bond investors provided Tuesday to close out the Securities and Exchange Commission’s first regional field hearing on the municipal market.
The muni market is significantly less fair to investors than other securities markets, said investor Jason Lehman.
“Dealer intermediaries control market access,” he said. “The dealer community is incented to retain control.”
Information about issuers and their debt is hard to obtain and information that is available is needlessly complex, according to Lehman, the founder and chief executive of a quantitative trading company.
“The investor in municipal securities must also confront a dizzying degree of complexity,” he said. “Even I still feel challenged by the task of picking apart a municipal prospectus.”
Another retail investor on the panel, Peter Kuhn, suggested that any bond prospectus include a one- or two-page summary sheet.
Panelist Irv Siminoff, a retired businessman and World War II veteran, echoed Kuhn’s call for simplicity.
“A lot of people don’t have the resources, temperament, or time to go through a prospectus,” Siminoff said, seconding Kuhn’s call for a summary tear sheet that follows a standard formula. “The tear sheet should be developed up front by the SEC or someone who can say up front, 'You’ve got to follow this — don’t deviate.’ ”
Kuhn said market changes in the wake of the global financial crisis and the demise of most municipal bond insurers make it much more important for investors to have accurate information about the issuers of their bonds.
“In the post-meltdown environment from 2008 forward, bonds lost their homogeneous character,” he said. “I don’t think I have a good way, as sophisticated an investor as I am, to monitor and track material information.”
Kuhn is the founder and principal of an employee-benefit consulting firm.
Lehman said the worst part of the municipal bond ownership experience is having to sell a bond before maturity. “When a muni investor tries to sell that security, they will suffer a punitively expensive process,” he said.
Lehman believes the municipal market should be able to incorporate a “limit-order” process, in which the owner can make the security visible to the entire market and set a minimum price.
“There are many cases when you don’t need to sell an asset instantaneously,” he said.
SEC commissioner Elisse Walter, who led the hearing, said she had been looking forward to the investor panel more than any other one, and was not disappointed. Walter will lead five other hearings around the country over the coming months.
The SEC plans to follow up with a staff report summarizing what was learned and possible recommendations for regulatory changes, industry best practices, and legislative changes.
