SEC Questions Mutual Fund Muni-Debt Prices

The Securities and Exchange Commission is investigating whether some mutual funds have overstated the value of risky municipal bonds that are thinly traded, according to people familiar with the matter.

The Wall Street Journal notes that the SEC probe, which is part of the agency's broader effort to investigate possible abuses in the municipal-bond market, comes at a time of concern about financial stresses on municipal borrowers.

The agency's concern is that investors in high-yield muni-bond mutual funds could be misled about the true value of their investment, according to the paper. These people cite the weakened muni market of the past few months. Fund managers have had to sell high-quality liquid assets in their portfolio to come up with cash as investors have withdrawn money from muni funds at an unprecedented rate.

As The Journal notes, in high-yield funds, which invest in "junk"-rated bonds, that selling can leave these bonds representing a higher proportion of the remaining assets. That change increases the odds that mismarking of these less-liquid assets overstates a fund's value, masking losses.

From mid-November through Friday, muni-bond mutual funds have suffered net outflows of about $24.7 billion, according to Thomson Reuters unit Lipper FMI.

A spokesman for the SEC declined to comment for the paper.