WASHINGTON — Securities and Exchange Commission examiners have been closely scrutinizing municipal bond mutual funds, sources familiar with the inquiries said Friday.
“They’re looking at muni funds period, soup to nuts,” said one source who did not want to be identified. “They’re looking at every aspect of the business — where are the risky areas and are there problems in those areas.”
Mutual fund companies with muni funds have been responding to SEC requests for “a massive amount of information,” the source said.
The commission’s examiners want to know about fund holdings and to what extent they own certain debt, such as tender-option bonds and unrated securities. They want details on fund-owned munis that have defaulted. They also are asking the funds how they conduct credit analysis and how they determine the values of the municipal securities they hold, sources said.
The examinations are being conducted by regional SEC staff, according to the sources, who said the SEC began the inquiries because of the recent focus on the muni market, including concerns about the financial stress on state and local governments and nonprofit or corporate borrowers.
The Wall Street Journal reported Friday that the SEC is investigating whether some of the funds have overstated the value of high-yield municipal bonds that are infrequently traded.
Some sources said the investigation may have been prompted by the ongoing litigation between shareholders in seven muni funds managed by OppenheimerFunds that is pending in a federal court in Denver. But lawyers on both sides of the litigation said they were unaware of any SEC investigation of funds’ valuations of muni debt.
In lawsuits seeking class-action status that were filed in 2009, shareholders claim that the prospectuses and registration statements of the funds contained material misstatements and omissions in violation of the Securities Act of 1933. The suits also allege that the funds unlawfully changed their investment policies without a vote of the shareholders in violation of the Investment Company Act of 1940. The shareholders are seeking unspecified damages or a return of what they invested minus any money they made on the investments.
Lawyers for the Oppenheimer funds deny the charges and have asked that suits be dismissed.
The suits have been consolidated in the federal court in Denver for pre-trial purposes, but would be tried in the district courts in which they were filed if not settled.
