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Bond oversight lax according to Securities and Exchange Commission

Wall Street banks may not be exercising proper supervision of state and local government bond sales, the Securities and Exchange Commission said, warning investors about risks in the $3.7 trillion municipal market.

Reviews of underwriters showed that some may not be sufficiently examining bond documents for evidence of fraud, the agency’s Office of Compliance Inspections and Examinations said today. Banks are required to review bond documents to guard against false statements and can face sanctions if they don’t.  SEC has set up an enforcement unit to police the municipal market for fraud. In August 2010, it settled claims against New Jersey that the state had misled investors by masking inadequate pension funding in $26 billion of bond sales. Later that year, four San Diego city officials agreed to financial penalties to settle the agency’s claims that they failed to inform investors of “fiscal problems’ tied to municipal retirement plans.

The SEC also has stepped up oversight of the municipal market as states and cities continue to deal with the effects of the 18-month recession that ended in June 2009. Amid such strains, the number of U.S. municipal-bond defaults doubled in the past two years, compared with the average from 1970 to 2009, driven by bonds sold for health-care and housing projects, according to Moody’s Investors Service.