Regulator to bond dealers: Don’t rip off investors

The Municipal Securities Rulemaking Board today warned bond dealers not to misprice tax-free bonds in the wake of Standard & Poor’s downgrade of the long-term sovereign credit rating of the U.S.
Pre-refunded municipal bonds, backed by escrow funds that are typically invested in U.S. Treasury securities, are expected to be downgraded later today by Standard & Poor’s.
Last month, as a result of putting the U.S. rating on credit watch, Standard & Poor’s put 2,827 pre-refunded bonds on its watch list. In addition, the MSRB said rating agencies might also cut the ratings of municipal issuers that have large numbers of federal employees or rely on federal government funding.
“Any dealer that uses a financial market disruption to manipulate the pricing of municipal securities will be violating federal law,” according to a statement released by the MSRB.
Although it had observed no unusual municipal market activity, the statement said the MSRB is reiterating guidance about its investor protection rules.
The self-regulator warned that offending bond dealers who trade “at prices that are not fair and reasonable would be referred to the appropriate enforcement agency.”