Regulator cites limited ability to protect investors; 'we could do more'
The Securities and Exchange Commission wants to give investors more faith in the price and quality of the municipal bonds that they buy and sell, and it is asking Congress for the authority to demand it.
In a report recommending changes to the $3.7 trillion muni market, the SEC said that it will remain limited in its ability to protect investors if it doesn't gain the power to improve disclosure and require that issuers produce audited financial statements.
“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,” SEC Chairman Mary Schapiro said.
About 75% of outstanding U.S. munis — the securities that municipalities sell to finance infrastructure projects — are held by individual investors, according to the SEC.
The muni market is “relatively illiquid and opaque,” and offers less price transparency than the equities market, “particularly on a pre-trade basis,” the report said. Investors have “very limited access” to information about what market participants are interested in buying or selling and at what price.
The market also carries “relatively high transaction costs compared to the equities market, especially for retail-size trades,” according to the report.
The Municipal Securities Rulemaking Board, a self-regulatory organization for the industry, provides free public access to muni trade prices and bond offering documents through its Electronic Municipal Market Access website.
The MSRB also encourages state and local government issues to provide additional information to EMMA on a voluntary basis to help investors, including accounting standards and information about state and local government bank loan financings.
“We will review the recommendations of the SEC report as part of our ongoing effort to facilitate municipal market transparency, improve disclosure and ensure a fair and efficient market,” MSRB chairman Alan Polsky said.
Yesterday, in reaction to concerns over market indexes such as the London Interbank Offered Rate, the MSRB said that it would study how muni market indexes are created and develop educational materials about their use.
The SEC report recommends that the commission be able to establish the format and content of financial statements that muni issuers have to provide, and that it be given a way to enforce issuer compliance.
The SEC also wants the Internal Revenue Service to be allowed to share with the commission any information from tax returns, audits and exams that relates to muni securities offerings, especially when fraud is suspected.
The SEC has some authority now over those who underwrite or sell muni securities and in recent years has moved to strengthen requirements for the type of events that issuers must disclose and how quickly.
“This market simply hasn't gotten the attention it deserves, given its significance,” Elisse Walter, an SEC commissioner, said during a call with the media.
The report also said that muni securities have lower default rates than corporate or foreign-government bonds and that most of the defaults are in revenue bonds issued for nongovernmental efforts such as multifamily housing, hospitals, nursing homes or industrial development bonds.
