The Securities and Exchange Commission issued its 164-page "Report on the Municipal Securities Market" (the "Report") on Tuesday, July 31, 2012.  Click here to read the complete Report.  The Report provides an overview of the municipal securities market, the regulatory structure and the roles of key market participants.  The Report identifies two key areas of concern in the municipal securities market: disclosure and market structure; and also makes recommendations for potential further consideration, including legislative changes, Commission rulemaking, Municipal Securities Rulemaking Board ("MSRB") rulemaking and enhancement of industry "best practices." 

Report Identifies Areas of Concern in Disclosure

The Report discusses several key areas of concern for expanded and timelier disclosure in the municipal market including:

  • Financial Statements and Financial Information.
  • Disclosure by Conduit Borrowers.
  • Pension Funding Obligations and Other Post-Employment Benefits ("OPEBs") Disclosure.
  • Exposure to Derivatives.
  • Disclaimers of Responsibility for Information Included in Official Statements and Other Disclosures.
  • Disclosure of Conflicts of Interest and Other Relationships or Practices.

Recommendations Relating to Disclosure

The Report makes recommendations for possible legislative and regulatory changes to the SEC's existing authority and a recommendation that market participants continue to strive for high-quality disclosure practices through development and enhancement of best practices guidelines. The possible legislative changes do not include a request to repeal the legal provision known as the Tower Amendment which prohibits the SEC from collecting bond documents prior to issuance.

Possible Legislative Changes

The following are possible legislative approaches that could be considered in order to provide the Commission authority to establish improved disclosures and practices in the municipal securities market.

  • Authorize the Commission to require that municipal issuers prepare and disseminate official statements and disclosure during the outstanding term of the securities, including timeframes, frequency for such dissemination and minimum disclosure requirements, including financial statements and other financial and operating information, and provide tools to enforce such requirements.
  • Amend the municipal securities exemptions in the Securities Act and Exchange Act to eliminate the availability of such exemptions to conduit borrowers who are not municipal entities under Section 3(a)(2) of the Securities Act.
  • Authorize the Commission to establish the form and content of financial statements for municipal issuers who issue municipal securities.
  • Authorize the Commission to require municipal securities issuers to have their financial statements audited, whether by an independent auditor or a state auditor.
  • Provide a safe harbor from private liability for forward-looking statements of repeat municipal issuers who are subject to and current in their ongoing disclosure obligations that satisfy certain conditions, including appropriate risk disclosure relating to such forward-looking statements and, if projections are provided, disclosure of significant assumptions underlying such projections.
  • Permit the Internal Revenue Service to share with the Commission information that it obtains from returns, audits, and examinations related to municipal securities offerings in appropriate instances and with the necessary associated safeguards, particularly in instances of suspected securities fraud.
  • To provide a mechanism to enforce compliance with continuing disclosure agreements and other obligations of municipal issuers to protect municipal securities bondholders, including possible enforcement by trustees of continuing disclosure agreements.  

Possible Regulatory Changes

The following are possible actions identified in the Report that the Commission could pursue under its existing regulatory authority to improve disclosures and practices in the municipal securities market:

  • The Commission could host market participants, regulators, and academics at an annual conference on the municipal securities markets.
  • The Commission could consider issuing updated interpretive guidance regarding disclosure obligations of municipal securities issuers and others.
  • The Commission could consider amendments to Exchange Act Rule 15c2-12 to further improve the disclosures made regarding municipal securities.
  • The Commission should continue to work with the MSRB to strengthen its rules and further enhance its Electronic Municipal Market Access System ("EMMA").  

Municipal Market Initiatives

The Report recommends that municipal issuers and other market participants should follow and encourage others to follow existing industry best practices and expand and develop additional best practices guidelines in a number of areas to enhance disclosures and disclosure practices in the municipal securities market.

Municipal Market Structure

The Report states that individuals, or "retail" investors, directly or indirectly hold more than 75% of the outstanding municipal securities and that trades in the municipal market are decentralized in an over-the-counter dealer market and the market is "illiquid and opaque". The Report also notes the varying access to pricing information among dealers, institutional investors and retail investors with retail investors having relatively little pricing information.

Recommendations Relating to Municipal Market Structure

The Report identifies possible recommendations to enhance price transparency and promote fair access to prices to improve market efficiency, promote competition, and ultimately facilitate the best execution of retail customer orders in municipal securities. The possible recommendations include the following:

Improve Pre-Trade Price Transparency

  • The Commission could consider amendments to Regulation ATS (alternative trading systems) to require an ATS with material transaction or dollar volume in municipal securities to publicly disseminate its best bid and offer prices and, on a delayed and non-attributable basis, responses to "bids wanted" auctions.
  • The MSRB could consider rules requiring a brokers' broker with material transaction or dollar volume in municipal securities to publicly disseminate the best bid and offer prices on any electronic network it operates and, on a delayed and non-attributable basis, responses to "bids wanted" auctions.  

Improve Post-Trade Price Transparency

  • The MSRB could consider requiring municipal bond dealers to report "yield spread" information to its Real-Time Transaction Reporting System to supplement existing interest rate, price and yield data.
  • The MSRB should promptly pursue enhancements to its EMMA website so that retail investors have better access to pricing and other municipal securities information.  

Improve Existing Dealer Pricing Obligations

  • The Commission and the MSRB should consider initiatives to improve the understanding of retail investors as to the various ways in which they might buy or sell a municipal bond, and the relative advantages and disadvantages of each.
  • The Commission and the MSRB could consider ways to encourage the use of ATSs or similar electronic networks that widely disseminate quotes and provide fair access.
  • The MSRB should consider encouraging or requiring municipal bond dealers to provide retail customers relevant pricing reference information in connection with any municipal securities transaction a municipal bond dealer effects for such customer.
  • The MSRB should consider issuing more detailed interpretive guidance to assist dealers in establishing the "prevailing market price" for a municipal security, for purposes of determining whether the price offered a customer (including any markup or markdown) is fair and reasonable.
  • The MSRB should consider requiring municipal bond dealers to disclose to customers, on confirmations for riskless principal transactions, the amount of any markup or markdown.  

The MSRB should consider a rule that would require municipal bond dealers to seek "best execution" of customer orders for municipal securities which would obligate those dealers to obtain the best prices for those customers.