Letting investors know when a dog critical to a bond hasn't barked


SAN DIEGO and Krispy Kreme Doughnuts shops have at least two things in common. They are sweet spots to visit. But they've left a sour taste in the mouths of investors.

The city and the doughnut purveyor are having money problems. Both entities also have failed to file periodic financial reports demanded by investors and regulators.

The Krispy Kreme entry in newspaper stock tables contains the designation "lf." That means "late filing."

In future bond issues, San Diego will have to declare that it failed to file financial reports on time.

Call it bureaucratic mission creep on the part of regulators. Call it cost shifting by investment firms seeking to trim their credit analysis budgets.

Improved transparency

Call it improved transparency on behalf of investors.

Whatever you call it, organizations seeking to raise money from the public have faced increasing demands to comply with disclosure rules.

By itself, the failure by a public company or local government to make promised disclosures would stain its ability to attract capital, even after financial conditions improve.

The obvious irony is that few investors read financial disclosure documents.

In the case of municipal bonds issued by state and local governments, wealthy investors hope they are protected in loco parentis by credit-rating agencies, bond insurance providers and their investment advisers.

Nonetheless, state and local governments that issue bonds must file, to authorized information vendors, periodic reports and disclosures of certain events, such as a change in a credit rating or an unscheduled drawdown of debt reserves.

Reports made public

Four private information vendors and agencies in a few states make these reports available to the public.

A so-called central post office has been created by the municipal bond industry to facilitate the process.

In the latest twist, Digital Assurance Certification LLC, or DAC, has created a Web site, www.dacbond.com, where investors can obtain documents for free.

The Orlando, Fla., company is hired by issuers of tax-exempt bonds to "assure" and "certify" compliance with reporting requirements by electronic filings.

DAC not only makes filings available; it prompts state and local officials to make timely filings and rings an alarm bell when compliance lags.

Most disclosure documents are routine and boring, to be sure. But the one that isn't filed, like the dog that didn't bark, can be the critical clue for investors.

'Wake-up call'

"It allows you to manage an investment portfolio by exception," said Paula Stuart, chief executive of DAC. "A failure to file is a wake-up call."

Investment banks are pushing ever more sophisticated financial products at state and local officials, who often are far less sophisticated.

Interest rate swaps, variable-rate instruments backed by letters of credit and other exotica have moved from Wall Street to city hall. Their riskiness makes disclosure all the more important.

Martha Mahan Haines, chief of the office of municipal securities at the Securities and Exchange Commission, said she is reviewing the information that should be disclosed as well as disclosure mechanisms.

To strain the Sherlock Holmes metaphor, more dogs have been loosed on taxpayers and the investing public. It helps if they bark frequently.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at yourmoneytribune.com

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