On July 31, 2012, the Securities and Exchange Commission (“SEC”) issued its “Report on the Municipal Securities Market” in which it recommends that Congress make certain changes to the laws and regulations surrounding the municipal securities market. The SEC’s recommendations address disclosure and transparency, financial reporting and accounting, and investor protection and education issues. If the SEC’s recommendations are implemented, the burdens and benefits of additional initial and continuing disclosure will be coming to a municipal securities offering near you.
The SEC’s recommendations would change the landscape for investors. Currently, investors have very limited access to information regarding bid and ask quotations. While there is some pre-trade price transparency through electronic networks operated by broker’s brokers, ATSs, or similar trading systems, that information is not generally accessible by the public. The SEC’s recommendations would improve both pre-trade and post-trade price transparency by requiring dissemination of best bid and offer and yield spread information and by requiring the MSRB to make updates to its EMMA website so that retail investors could have access to pricing and other relevant municipal securities information.
For issuers, these recommendations will mean additional disclosure (with additional cost). However, for investors, the SEC’s recommendations would provide many benefits. Greater transparency, particularly in the secondary market, would provide investors with far better pricing information. Rather than relying on alternate valuation methodologies or a municipal bond dealer’s recent trades in comparable bonds, investors will be able to identify actual recent trades in the exact security, or at least other comparable securities that have been traded in general (and not just by the dealer with whom the investor is working). In addition, the enhanced disclosure would allow for a more thorough analysis of the underlying risks associated with a municipal securities purchase, including the credit quality of the municipal securities, municipal issuers, and conduit borrowers. Risk evaluation may be increasingly more important to investors as credit enhancements (such as letters of credit issued by a bank, governmental guarantees, or bond insurance policies), which were common during 2000 to 2007, have decreased in the wake of the recent financial crisis.
It will be interesting to see how quickly (and whether) Congress chooses to address the SEC’s legislative recommendations.