The Securities and Exchange Commission said Tuesday that Congress should grant the agency more authority to protect investors in the “opaque” municipal bonds market, which enables local governments to finance roads, schools and other projects.
In a 165-page report, the SEC laid out its complaints about the way the $3.7 trillion municipal bond market operates, unhampered by mandatory disclosure rules or uniform accounting standards. Without such requirements, investors who purchase these bonds can’t make informed decisions about what they’re buying, SEC officials said.
“The municipal securities market is the bedrock for funding of local government projects throughout our country,” SEC Chairman Mary L. Schapiro said in a statement. “It is essential that the market work well and that investors have confidence in it.”The market’s vulnerabilities continue to play out as various municipalities struggle to meet their financial obligations with revenues that have plummeted in the economic downturn. The situation has been further complicated in the past two years by revelations that bankers manipulated the markets by rigging municipal-bond transactions, cheating municipalities of the best deals.
The SEC’s authority in the municipal bond market is limited. The agency oversees the banks and investment firms that municipalities hire to make initial bond offerings, and can sanction local entities that have defrauded the public. But it has no authority to oversee municipalities, and it can’t review documents before municipal bonds are offered.
On Tuesday, the SEC said Congress should allow it to set baseline disclosure standards for municipal bonds and create a viable way to enforce compliance.
Elisse B. Walter, the SEC commissioner who authored the report, said disclosures should provide what any reasonable investor would want to know in a timely fashion. Someone interested in buying a bond from a state should be informed of the state’s current financial condition, its tax base and other relevant data, she said.
Historically, municipal bonds have had a low default rate, relieving municipalities of demand for frequent disclosures and current financial information. As a result, financial statements are sometimes outdated. The SEC report recommended that Congress require issuers to audit their financial statements and release them more frequently.The report also suggested some steps the agency can take without approval from Congress, but Walter acknowledged that the SEC “is at the edge of its current authority.”
Trade groups representing municipal issuers opposed similar suggestions in the past, arguing that they amount to a government intrusion on states’ rights.
The Municipal Securities Rulemaking Board, the industry’s self-regulating body, said that if the SEC executes the proposals, they must be tailored to a market that has more than 40,000 issuers.
“It’s a very diverse market,” said Lynnette Kelly, executive director of MSRB, which is overseen by the SEC. “The vast majority of municipal issuers are small infrequent issuers who may come to the market every five years to fund a fire truck or a school addition. So you need to resist a one-size-fits-all approach.”