The Securities and Exchange Commission today issued a comprehensive report with recommendations to help improve the structure of the $3.7 trillion municipal securities market and enhance the disclosures provided to investors.
The report is the culmination of an extensive review of the municipal securities market that was initiated by SEC Chairman Mary L. Schapiro in mid-2010 and led by SEC Commissioner Elisse B. Walter. The recommendations address concerns raised by market participants and others in public field hearings and meetings with Commissioner Walter and SEC staff as well as the public comment process during the agency’s review of the municipal securities market.
“The municipal securities market is the bedrock for funding of local government projects throughout our country. It is essential that the market work well and that investors have confidence in it,” said Chairman Schapiro. “While we have put in place measures to help investors make more knowledgeable decisions about municipal securities, we could do more for investors with statutory authority to improve disclosure and muni market practices.”
Commissioner Walter said, “On behalf of my colleagues and the professional and dedicated staff at the SEC, I am pleased that the report brings into clear focus the current state of the municipal securities market and recommends potential action to address issues raised by investors, issuers, and other market participants. I look forward to moving forward with the efforts articulated in our report to further strengthen and enhance this vital market.”
State and local governments issue municipal securities to finance a wide variety of projects that are critical to building and maintaining the nation’s infrastructure.
At the start of 2012, there were more than one million different municipal bonds outstanding totaling $3.7 trillion, with 75 percent held by individual “retail” investors.
Despite its size and importance, the municipal securities market has not been subject to the same level of regulation as other sectors of the U.S. capital markets due to broad exemptions under federal securities laws for municipal securities.
Without a statutory regime for municipal securities regulation, the SEC’s investor protection efforts in the municipal securities market have been limited. The SEC’s report discusses potential legislative changes that could help improve disclosures to investors. For instance, the report recommends that Congress consider authorizing the SEC to set baseline disclosure standards and require municipal issuers to have audited financial statements.
Other potential legislative changes recommended in the report to help improve disclosures and practices in the municipal securities market include:
- Eliminating the availability of Securities Act and Exchange Act exemptions for conduit borrowers who are not municipal entities.
- Authorizing the Commission to establish the form and content of financial statements for municipal issuers who issue municipal securities, and to recognize a designated private-sector body as the standard setter for generally accepted for federal securities law purposes.
- Providing a safe harbor from private liability for forward-looking statements of repeat municipal issuers that satisfy certain conditions.
- Permitting the Internal Revenue Service to share information with the SEC that it obtains from returns, audits, and examinations related to municipal securities offerings, particularly in instances of suspected securities fraud.
- Providing a mechanism, through trustees or other entities, to enforce compliance with continuing disclosure agreements and other obligations of municipal issuers to protect municipal securities bondholders.
In addition to potential legislation, the SEC’s report identifies potential rulemaking by the Commission or the Municipal Securities Rulemaking Board and enhancement of best practices by the municipal securities industry.
The SEC’s report discusses several disclosure issues including the timing and content of financial information, disclosures relating to pension and other post-employment benefit plans, derivatives use by issuers and obligated persons, and conflicts of interest including pay-to-play practices. The report also reviews the current structure of the municipal securities market and discusses potential initiatives to improve pre-trade and post-trade price transparency and support existing dealer pricing obligations.
The report was prepared after substantial input from investors, investor advocates, market professionals, and representatives of municipal issuers – including those who participated in the SEC’s field hearings in San Francisco, Washington D.C., and Birmingham, Ala.
The SEC already has taken steps to improve municipal securities disclosure within its limited regulatory authority. In May 2010, the Commission adopted amendments to Exchange Act Rule 15c2-12 that were aimed at improving the quality and timeliness of municipal securities disclosure. The changes were intended to help provide investors with enhanced information by further regulating those who underwrite or sell municipal securities. The measures strengthened existing requirements for the scope of securities covered, the nature of the events that issuers must disclose, and the time period in which disclosure must be made.