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George Smaragdis (202) 728-8988
Herb Perone (202) 728-8464

FINRA Takes Sweeping Action to Protect Muni Bond Investors

Regulator Issues Investor Alert, Regulatory Notice, Launches Industry Sweeps

Washington, D.C. —The Financial Industry Regulatory Authority (FINRA) announced today that it has launched a comprehensive initiative to survey retail sales practices in the municipal securities market, promote investor protection in that market and give retail investors online tools and information that will help them make informed investment decisions when trading in that market.

FINRA investigators currently are conducting sweeps to gather information in three distinct areas. One broad sweep is looking at industry sales and supervisory practices with respect to sales of municipal bonds to retail investors. Firms are being asked to provide FINRA with detailed data on a range of retail muni bond transactions during the first quarter of this year. The requested information includes sales data, marketing data, pricing data and procedures, disclosure practices, customer complaints and supervisory procedures and practices.

A second, more targeted sweep is examining potential conflicts, disclosure practices and marketing by firms underwriting municipal securities involving swaps and derivatives for small municipalities. These highly complex instruments typically allow municipalities to finance debt with lower variable interest rates than they would receive through a fixed offering, but involve significant interest rate and repayment acceleration risks through the swap contracts - something that has recently caused much-publicized financial distress for municipalities such as Jefferson County, AL, and the Erie, PA, School District. A third, narrowly targeted sweep is seeking information from firms that engaged in retail sales of certain so-called municipal Gas Bonds that were underwritten and guaranteed by the now-defunct Lehman Brothers and quickly became distressed.

Also as part of its municipal bond initiative, FINRA today issued a Regulatory Notice to securities firms and brokers reminding them of their ongoing obligation to disclose material information to customers - including changes in the financial condition of the issuing municipality - as well as their obligations regarding suitability of recommendations to customers and supervision of the firm's municipal securities activities. At the same time, to help the investing public better understand and mitigate the risks of investing in municipal bonds, FINRA today issued an Investor Alert called Municipal Bonds — Important Considerations for Individual Investors, as well as an online Muni Bond Check List, which provides a step-by-step guide to help investors avoid the most common pitfalls of muni bond investing.

"FINRA is taking concerted action to ensure that investors are aware of both the risks and the benefits that might be associated with a muni bond investment. Muni bonds can be a valuable part of an investor's portfolio, and investors should be aware of any changes in a bond issuer's financial condition or operating results. Firms should also be aware of their responsibilities when working with muni bond investors," said FINRA Chairman and CEO Richard G. Ketchum.

The FINRA Investor Alert, issued in partnership with the Municipal Securities Rulemaking Board (MSRB), also informs investors that brokerage firms and banks that sell muni bonds are required to have procedures to obtain annual financial and operating data from muni bond issuers. Investors should treat missing or past-due financial information from a bond issuer as a potential red flag.

Currently, investors may be able to receive muni bond disclosures for a fee through one of the Nationally Recognized Municipal Securities Information Repositories. However, beginning on July 1, 2009, all ongoing disclosures will be available for free through the MSRB's Electronic Municipal Market Access (EMMA) website. The EMMA website also features real-time trade pricing and historical trade data.

While muni bonds have historically been considered relatively low-risk investments, investors should be aware that they carry certain risks:

  • Defaults, while quite rare, do occur.
  • Information about financial problems that affect the bond's issuer has not always been readily available to investors.

In cases where an issuer has purchased bond insurance, the higher overall credit rating of a bond may be more reflective of that protection than of the financial condition of the issuer.

The Municipal Bonds alert also outlines the basic characteristics, risks and benefits of investing in municipal bonds. A complete guide to investing in bonds is available at FINRA's Smart Bond Investing Learning Center.

FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through comprehensive regulation. FINRA touches virtually every aspect of the securities business - from registering and educating all industry participants to examining securities firms; writing and enforcing rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and firms. For more information, please visit our Web site at