The US Securities and Exchange Commission is calling for broad reforms to the $3.7 trillion municipal bond market. Today, it published a 165-page report that included its recommendations. One of its main concerns is that individual investors have the lower hand when they sell and buy purchase bonds that are issued by the states and cities. The SEC wants Congress to mandate that municipal bond issuers give investors the same information that they would get in other financial markets because right now, the market is not just “illiquid” but also “opaque.”
Whether through exchange-traded funds, mutual funds, or directly, investors currently hold 75% of the over 1 million bonds that are outstanding. One reason municipal bonds are so popular is that the income from these instruments are usually tax-exempt. However, problems with the market have recently surfaced that have caused the Commission concern.
A number of municipalities have tried to escape their bondholder commitments by filing for bankruptcy. Meantime, bankers have had to go to trial for alleged bid rigging while taking advantage of states and cities. Also, the general lack of information for investors about the municipal bonds that they are purchasing makes it difficult for them to assess prices (Because the majority of bonds are not traded daily, brokerages and banks are the ones that primarily get to determine how the bonds are priced) and financial firms are having an easier time charging municipalities too much when assisting them in issuing bonds.
The SEC believes that to create greater trust in the municipal bond market, the reasons for municipal distress and the recent bankruptcies have to be explored. It would also like the Municipal Securities Rulemaking Board to make financial firms provide clients the “best execution” for the selling and buying of bonds. (The Times said that cities and states owe retirees up to $4 trillion than they had budgeted, which means that municipal investors and retirees will be competing for the same funds to get their money.)
Even though the regulator is calling for reforms, Commissioner Elisse Walter made it clear to reporters that the SEC isn’t asking for new federal regulations. It does, however, feel that it currently lacks the authority to implement even the simplest modifications, which typically require a Congressional act. Right now, different laws are restricting the Commission’s ability to supervise local and state issuers. As a result, reports Reuters, investors have to look to a variety of financial disclosures and accounting techniques to determine whether to buy their debt.
The SEC is recommending that the Commission, Congress, and market participants, including MSRB, look at implementing a combination of industry, legislative, and regulatory initiatives to improve not just the market but also investor protections.
If you believe that you may be the victim of municipal bond fraud, contact our institutional investment fraud lawyers right away. Shepherd Smith Edwards and Kantas, LTD, LLP represents clients nationwide.
SEC seeks more investor protections for U.S. municipal bond market, Reuters, July 31, 2012
Report on the Municipal Securities Market , SEC, July 31, 2012 (PDF)
More Blog Posts:
JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2012
Muni Debt Reform: SEC to Proceed with Field Hearing in Alabama, Stockbroker Fraud Blog, May 29, 2011
Not All Municipal Bond Issuers Are Adjusting Well to the SEC’s Efforts to Make the Market More Transparent, Institutional Investor Securities Blog, February 22, 2012