Oct. 29 (Bloomberg) -- Federal laws that exempt much of the $2.8 trillion municipal bond market from filing quarterly financial statements and U.S. Securities and Exchange Commission regulation should be repealed, Commissioner Elisse Walter said.

“Complete, timely and accurate disclosure is essential for proper functioning of the municipal securities markets, especially for efficient pricing,” Walter said yesterday in New York. “Municipal securities disclosure issues can only be addressed adequately through authority that federal securities regulators do not now possess.”

Walter is the third commissioner this year to call for municipal bond issuers to follow the same rules as sellers of corporate securities. SEC Chairman Mary Schapiro has hinted that the commission would seek expanded authority over the market sometime in 2010, and Commissioner Luis Aguilar called for greater oversight. All three have been appointed since 2008.

States, local governments and school districts pay higher interest rates than corporations with similar credit ratings because of an information vacuum that causes investors to demand more in yields. A 1975 law, the Tower Amendment, exempts cities and states that sell bonds from filing documents with the SEC.

“The commission could mandate that municipal disclosures be issued in a time period that makes critical information available when investment decisions are made,” Walter said in a lecture at Fordham University.

Three Years

As many as 25 percent of municipal borrowers go three years or longer without providing information to investors, according to a 2008 study by DPC Data Inc. of Fort Lee, New Jersey.

Federal law requires publicly held companies to issue quarterly financial statements and reveal pending litigation and financial plans. Municipal borrowers must present an annual financial statement and update investors on so-called material events, such as missed payments, use of reserve funds, credit- ratings changes or other circumstances that might affect the debt.

The Government Finance Officers Association, which represents state and local municipal officials, “strongly opposes any actions by the SEC or Congress” to give the commission “direct authority over municipal bond issuers or to directly or indirectly impose new disclosure or accounting standards,” according to a comment letter filed with the SEC in September.

Jeffrey Esser, chief executive officer of the association, didn’t return a phone call seeking comment.

Expanded Disclosure

Walter said expanded disclosure rules approved at a July 15 hearing didn’t go far enough. The decisions involved variable- rate demand obligations and material events within 10 business days of an occurrence.

Use of unregulated derivatives, such as interest-rate swap agreements, only “threatens to get worse as municipalities look for creative ways to manage budget shortfalls,” Walter said.

The municipal bond market is more risky than it has been in the past, Walter said, citing abusive practices by financial advisers and the increasing number of individual investors.

To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net.

Last Updated: October 29, 2009 00:01 EDT