The Financial Industry Regulatory Authority has updated its guidance for individual municipal bond investors by urging them to ask brokers questions about issuer disclosures and bond insurer ratings.
The authority's updated investor alert now asks those putting money into munis to question their brokers about the status of an issuer's disclosures and to be wary when they have not been filed.
"Brokerage firms and banks that sell muni bonds are required to have procedures in place to obtain material event notices and other disclosures," FINRA's alert states. "Ask your broker if a bond's issuer is up to date with its reporting of its annual financial/operating data. Treat missing or past due financial information as a potential red flag."
Bond insurance has become less common in recent years, but FINRA's new guidance also urges investors to scrutinize the credit ratings of bond insurers.
"A small percentage of municipal bond issuers include a repayment protection feature - most often bond insurance - to insure their bonds at the time they are issued," FINRA's guidance states. "A bond with insurance generally is able to come to market with a higher credit rating, making the bond more attractive to buyers, and at the same time lowering the issuing cost to the municipality. The protection can shield an investor from default risk to the extent that the protection provider promises to buy the bonds back or to take over payments of interest and principal if the issuer defaults."
"However, any guarantees are only as sound as the protection agent/insurance company that makes them," FINRA added. "For this reason, when considering an insured bond, be sure to take into account the credit rating and long-term viability of the bond insurer."
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