The Securities and Exchange Commission on Tuesday released a comprehensive report with recommendations to help restructure the $3.7 trillion municipal securities market and enhance the disclosures provided to investors.
The 165-page report focuses on two key areas of concern in the municipal securities market: disclosure and market structure. The Commission also provides a number of recommendations for potential consideration, including legislative changes, SEC rulemaking, Municipal Securities Rulemaking Board (MSRB) rulemaking and enhancement of industry best practices.
SEC Commissioner Elisse Walter (left) told reporters on a conference call that while the SEC had been “working actively” in the municipal market area for some time, “the market hasn’t gotten the attention that it deserves given its significance,” adding that the agency is hopeful the legislative recommendations it put forth in the report “will be taken seriously” by Congress.
Said Walter: “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.”
The report is the culmination of an extensive review of the municipal securities market that was initiated by SEC Chairwoman Mary Schapiro in mid-2010 and led by Walter. Schapiro said in a statement that while the SEC has “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.”
The report recommends that Congress consider giving the SEC the authority 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.
The report also identifies potential rulemaking by the SEC or the MSRB and enhancement of best practices by the municipal securities industry.
The 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.