December 15, 2010

On December 7, the Securities and Exchange Commission (SEC) held its second field hearing on the municipal securities market, echoing prior calls for stricter municipal market regulation and more disclosure.

The SEC held its first hearing in San Francisco in September.  Future hearings are scheduled for Illinois, Florida, and Texas.

At the conclusion of all of the hearings, the Commission staff will prepare a report including their recommendations for changes in legislation, regulations, and industry practice with regard to the municipal securities market.

The December 7 hearing, which was overseen by federal regulators from the SEC, the Municipal Securities Rulemaking Board (MSRB), and the Financial Industry Regulatory Authority (FINRA), was made up of five panels covering issues relating to market stability and liquidity, the investor experience, self-regulation, accounting, and Build America Bonds (BAB).

Participants on the panels included state and local government officials, municipal securities investors, academics, and experienced municipal market professionals representing the broker-dealer, municipal advisor, analyst, institutional investor, bond insurer, and auditor perspectives.

The hearing, chaired by SEC Commission member Elisse Walter, comes as the SEC has again begun to push for more timely disclosure of financial and other relevant information from municipal securities issuers.

Commission member Walter began the hearings with an announcement that the MSRB would be initiating a study of the structure of the municipal market with an emphasis on pre-transaction price discovery.  Walter has repeatedly warned that there is often no way of knowing the precise price of a municipal bond, particularly in the secondary market if the bond has not recently been traded.

The panel focusing on market structure touched on the subject of continuing disclosures, a very timely issue as the hearing follows the recent publication of the SEC’s proposed rules requiring continuing disclosures of municipal market securities.  Thomas Doe, founder and chief executive officer of Municipal Market Advisors, said the SEC ought to consider whether issuers that are unable to provide timely and complete continuing disclosures should have access to the capital markets.  Doe warned that it is difficult if not impossible for retail investors to navigate the inconsistent disclosures.

Only a small number of market participants can influence price discovery as the universe of firms consistently active in both the primary and secondary markets that are providing liquidity has become more concentrated, he added.

Speaking on a separate panel on investor impact, several retirees said that they had hoped the SEC would dictate a baseline of disclosure because it is difficult to easily find key information.  Several recent proposed rulemakings by the SEC have mentioned that the Commission might attempt to establish such baseline disclosures.

James Lebenthal, director of public affairs at Lebenthal & Co., said the time has come for Congress to repeal the so-called Tower Amendment, which restricts the SEC from collecting municipal securities offering documents prior to bond sales.  Because the Tower Amendment restricts federal regulation of issuers of municipal securities, regulators can only directly regulate broker-dealers and underwriters.