SEC Chairman Christopher Cox wants to start addressing what he considers gaps in the regulations governing the municipal securities marketplace. And the Municipal Securities Rulemaking Board has stated that it will be very interested in what the Commission comes up with.
Municipal securities are bonds issued by a state or local municipality that are then used to fund projects such as building a stadium or a convention center or filling some other governmental need.
In a speech earlier this month, Cox said that the federal regulators wrote the current rules for municipal securities back in the 1930s when the market was relatively small. Since then it has grown tremendously. There are almost $2.5 trillion of municipal securities outstanding, which is more than the gross domestic product of China. Last year alone, investors bought more than $430 billion in new municipal bonds and notes. That’s about the same size as the national defense budget, Cox noted.
In addition, the municipal bond market has evolved. Traditionally, municipal investors were more associated with a “buy and hold” strategy. But last year alone, more than $6 trillion in municipal securities changed hands, according to Cox.
“Today’s investors in municipal securities in many respects get second-class treatment under current law,” Cox said. “While these differences might have been justified when the securities laws were originally enacted, the old justifications don’t apply any longer.”
The SEC recently brought a case of fraud against the City of San Diego for its muni bonds. The city failed to disclose to municipal bond investors important information about its pension and retiree health care obligations. The city had under-funded pension obligations so that it could increase pension benefits, while deferring the costs. Investors were unaware of that. That information had a direct bearing on the security of the bonds.
The Commission also determined that both Orange County and San Diego made misleading statements in the offering documents for their municipal securities. They also gave misleading information to the credit rating agencies.
“The kind of securities fraud that we saw in the case of the Orange County bankruptcy and the San Diego pension scandal not only jeopardized the interests of the many individual investors who placed their trust in the City’s and County’s bonds, but also threatened the pocketbooks of millions of taxpayers, and the security of every one of the municipalities’ current and future retirees,” Cox said.
Cox outlined a few suggestions for ways to improve the municipal market. The first is to implement a “limited regulatory regime” that would establish more disclosure to the investors similar to that seen in the traditional securities market.
The Chairman also said that the muni bond industry should adhere to the Governmental Accounting Standards Board’s standards and that the federal government should give the SEC oversight of the Governmental Accounting Standards Board (GASB). And finally he urged Congress to step in and clarify the legal responsibilities that issuers have with regards to the disclosure documents they authorize.
The Municipal Securities Rulemaking Board, which regulates rules for municipal securities, said it welcomed additional review of the market by the SEC and that it hoped to schedule a meeting with the Commission to discuss the matter further.
“We hope to meet soon with the SEC to understand the details of the potential legislative changes broadly outlined by the Chairman,” said John Lawlor, Chairman of the MSRB, in a statement. “The MSRB looks forward to continuing to work with the SEC, the Congress, municipal issuers, and all market participants in reviewing ideas for improvements in the municipal market.”
There was also some positive Congressional support coming from Rep. Vito Fossella, (R-NY), a member of the Commerce Committee
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