September 21, 2010

SEC Begins Hearings on State of Municipal Securities Markets

Perceived safety is at issue

The Securities and Exchange Commission (SEC) launched its first in a series of field hearings on Tuesday aimed at exploring disclosure and transparency, credit ratings and internal controls in municipal securities markets.

While new issuance is down substantially over prior years due to large state budget deficits, the municipal securities market remains a priority with regulators due to its perceived safety.

“Despite the reputation of the [municipal] market as a ‘buy and hold’ market, trading volume is substantial, with approximately $3.8 trillion of long- and short-term municipal securities traded in 2009 in over 10 million transactions,” said SEC Commissioner Elisse Walter in her opening remarks.

She went on to note that despite its size and importance, the municipal securities market lacks the protections customary in many other sectors of the U.S. capital markets and she took care to emphasize “in spite of their well-deserved reputation for safety, municipal securities can and do default.”

“From 1999 to 2009, issuers defaulted on over $24 billion in municipal bonds out of a total of $3.4 trillion issued.  In 2009 alone, 194 municipal bond issues defaulted with an overall dollar amount of almost $7 billion in bonds,” Walter said.

Because the municipal market features government and private sector overlap, some industry officials suggested looking to the way in which corporate disclosure works as a framework for municipal disclosure. Walter responded by saying that while she believes much can be learned from the corporate world, it is “essential that we recognize the differences in the municipal and corporate finance worlds and we work together to evaluate what an appropriate framework for municipal finance disclosure should be in the future.”

Other hearings will be conducted in Chicago; Washington; Tallahassee, Fla.; and Austin, Texas. Each hearing will include participants from the local region and will examine different sets of issues, including investor protection and education; financial reporting and accounting; market stability and liquidity; the Municipal Securities Rulemaking Board; municipalities as conduit borrowers; offering participants, professionals and market intermediaries; Build America Bonds; and 529 plans.

At the conclusion of all of the hearings, the Commission staff will prepare a report concerning what we have learned, including their recommendations for further action that we should pursue, which may include legislation, rulemaking and changes in industry practice. 

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