Seven Senate Democrats called on the SEC to investigate any
possible misconduct by the financial advisors of municipal entities
in Puerto Rico during the years that led to the country's
current "dire debt crisis." The proposed investigation
would track misconduct pursuant to Dodd-Frank Act municipal bond
The Senators emphasized that Puerto Rico is facing approximately
$71 billion in debt and an estimated pension liability of $46
billion, along with "debt service payments that consume more
than one-third of its revenues." They explained that
amendments to the Security Exchange Act pursuant to Dodd-Frank Act
Section 975 require the MSRB to adopt, and to impose on financial
professionals, rules that are "designed to prevent fraudulent
and manipulative acts and practices . . . and, in
general, to protect investors, municipal entities, obligated
persons, and the public interest." The Senators emphasized
that the Securities Exchange Act also grants broad enforcement and
examination authority to the SEC and FINRA to implement the
"municipal entity protection mandate."
The Senators observed that the SEC has devoted "significant
attention" to municipal securities markets in past actions
that include numerous field hearings from 2010 to 2011, which
informed a 2012
report on the state of the municipal securities market. The
Senators noted that this report called for "far-reaching
reforms" in addition to Dodd-Frank Act registration
requirements for municipal advisors, some of which have been
implemented. The senators urged the SEC to provide an update on (i)
the status of the 2012 recommendations, and (ii) whether the SEC
needs new authorities in order to enhance its protection of
municipal entities in Puerto Rico and elsewhere.
The Senators warned the SEC that if it fails to investigate
adequately whether illegal conduct occurred in connection with the
underwriting, sale, distribution and trading of Puerto Rican debt
in the years leading up to the present crisis, then it's
possible that "investors will not regain confidence in Puerto
Rico's debt markets and Puerto Rico's access to normal
credit markets will remain impaired."
Senators Robert Menendez (D-NJ), Elizabeth Warren (D-MA), Bernie
Sanders (D-VT), Charles Schumer (D-NY), Kirsten Gillibrand (D-NY),
Jeffrey A. Merkley (D-OR) and Richard Blumenthal (D-CT) were the
sole authors of the letter.
Perhaps the questions that Congress should ask are these: Why are so many states, cities and municipal entities approaching insolvency? What factors drive governmental entities to run at unsustainable deficits? These are not trivial questions, since it is reasonable to expect that numerous governmental entities will go bust in the coming years. To borrow a phrase from the pols, "investors will not regain confidence in [governmental] debt" until the governments themselves prove they can break even at the very least. The federal government of the United States might be able to print money and make that currency valuable by mandating its use as collateral for financial transactions, but municipal entities cannot do the same. Eventually, those deficits cannot be sustained.
On a more parochial political note, why are two New York senators pushing for a portion of Puerto Rico's losses to be borne by financial institutions that tend largely to be based in New York, and that employ vast numbers of people across the City and the State? Advocating aggressively for measures that damage financial institutions based in New York would seem to injure the Senators' own constituents.
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