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The federal government, in the form of the SEC, is becoming more interested in the regulation of municipal bonds. On August 19, it was reported that New Jersey became the first state the SEC has charged with securities fraud for its failure to disclose to bond buyers it had underfunded its state pensions. New Jersey has agreed to settle the case.
According to Reuters, this is the first time the SEC has charged a state with violations of federal securities statutes. The action by the government is seen as evidence of an increasing interest in those who sell municipal bonds. This debt is used for public purposes such as roads, bridges, schools and hospitals.
Reuters reports a 1975 securities law known as the Tower Amendment has long been considered a shield for issuers of municipal bonds against federal intervention because it prohibits the U.S. government from requiring those issuers to file documents with the SEC before the securities are sold. However, the SEC has begun working on ways to circumvent the Tower Amendment. One member, Elisse Walter, has even called for its repeal.
SEC Chair Chairman Mary Schapiro is attempting to increase investor protections in part, by demanding more disclosure in the municipal bond market. The case against New Jersey is evidence of that effort by the Commission. "This is going to be an increased area of focus," bond lawyer Teri Guarnaccia of Ballard Spahr, LLP, told Reuters after learning about the New Jersey charges.
In the SEC Order (from NJ.com) outlining the charges and the settlement by the state, the Commission found the New Jersey had made material misrepresentations and omissions regarding the funding of its pensions. In compliance with the SEC under the Order, New Jersey has hired disclosure counsel and has made improvements in its disclosure policies and procedures.
Despite the fact it was charged with securities fraud, New Jersey's bond rating has not been affected.