SEC Releases Report On Municipal Securities Market, Calls On Congress For Legislation


On July 31, 2012, the SEC released a long awaited report on the $3.7 trillion municipal securities market. The SEC recognized that the more than one million municipal bonds outstanding are the bedrock for a variety of public infrastructure projects, from roads to hospitals and beyond. However, due to broad exemptions under federal securities laws, the municipal securities market has avoided facing the same level of regulation as other market sectors. Since no statutory regime exists for regulation of this market, the SEC has been limited in providing and enforcing investor protection efforts.

The thrust of the SEC’s report is a recommendation to Congress to pass legislation that would increase the SEC’s authority in the municipal securities market. The report explains that such legislation would not require the repeal or modification of any existing proscriptions on the SEC or the Municipal Securities Rulemaking Board (MSRB), and it would not eliminate exemptions for municipal securities under §3(a)(2) of the Securities Act or the exemptions under the Exchange Act. The report’s recommendations are instead focused on improved disclosures and developing the tools necessary to enforce compliance, which should make the market structure less opaque and thus more protective of investors.

The recommended legislation would grant the SEC authority to establish the form and content of financial statements for municipal issuers, including authorization to designate and oversee a private sector to govern financial statement standards. The Commission would also be authorized to require municipal issuers to prepare and make available baseline disclosure standards. Historically, such disclosures have not been called for because of municipal bonds’ low default rates. Proposed legislation would also authorize the SEC to require municipal securities issuers to have their financial statements audited by a state or independent auditor. However, if municipal issuers are subjected to and stay current with the proposed ongoing disclosure obligations, they would be given a safe harbor from private liability for forward-looking statements, similar to the one found in the Private Securities Litigation Reform Act for reporting public companies.

The proposed legislation would also permit the IRS to share with the SEC information it obtains from returns, audits, and examinations related to municipal securities offerings in instances of suspected securities fraud, something the IRS is not currently permitted to do in connection with civil enforcement of the securities laws under §6103 of the Internal Revenue Code. The report notes that if such sharing were allowed by Congress, enforcement actions would be more comprehensive, consistent, and timely, and would promote efficient use of limited resources. IRS officials have publicly supported increased information sharing if Congress chooses to pass the legislation.

The Securities Industry and Financial Markets Association (SIFMA), which represents the shared interests of hundreds of securities firms, banks, and asset managers, released a statement applauding the depth of the report and expressing its support of legislation that brings additional disclosure to the municipal securities market. Similar legislation has been opposed in the past by trade groups representing municipal issuers who argue that it would amount to a government intrusion on states’ rights. Lynette Kelly, executive director of the MSRB, cautioned that if the Commission executes the proposals they must be tailored to a market that has more than 40,000 issuers, the vast majority of which are small and infrequent, rather than a one-size-fits-all approach.

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