The U.S. Securities and Exchange Commission is seeking power to force better disclosure by borrowers in the $3.7 trillion municipal-bond market, which is governed by laxer rules than those for businesses.
The SEC said in a report today that Congress should give it more authority to decide what municipalities disclose to investors and to ensure that they comply. It also recommended ending exemptions that allow businesses that borrow in the municipal market to provide less information than they would in the corporate market, as well as steps to require more transparency in trading.
“The municipal securities market is the bedrock for funding of local government projects throughout our country,” SEC Chairwoman Mary Schapiro, 57, said in a statement. “It is essential that the market work well and that investors have confidence in it.”
The market, granted self-regulation by Congress in 1975, has drawn scrutiny as local governments have struggled with diminished tax collections and rising pension obligations after the longest recession since the 1930s.
The SEC’s release marks the latest effort to overhaul the market, which was roiled during the 2008 credit-market crisis as derivative-laden financings unraveled and cost governments billions. The Dodd-Frank law, signed two years ago, gave the Municipal Securities Rulemaking Board more sway in regulating financial advisers and banks.
The SEC’s recommendations may succeed on Capitol Hill, said John McNally, a lawyer with Hawkins Delafield & Wood LLP in Washington and former president of the National Association of Bond Lawyers.
“There’s a renewed interest in disclosure in the municipal market,” he said. “These proposals could receive a great reception in a legislative form.”
Participants in the market, which finances public works as well as projects such as hospitals, real-estate developments and retirement homes, have long had looser disclosure rules than those faced by corporations.
Governments aren’t required to file documents with regulators as corporations do, and the SEC said that the slow pace at which annual reports arrive worries investors. The commission said the system is “illiquid and opaque.”
“Investors in the municipal securities market don’t have all the protections and access to information that they need,” SEC Commissioner Elisse Walter told reporters.
The SEC requested authority to directly set disclosure standards and provide the commission with the power to enforce them. It now regulates such disclosures indirectly, through its authority over banks that underwrite bond deals.
The SEC also said Congress should allow it to require corporate-style disclosures for so-called conduit borrowers, which guarantee bonds sold by municipal agencies. In such deals, a government agency sells tax-exempt bonds and passes the money to another party, such as a business, that will repay the debt. Such bonds are responsible for about 70 percent of the municipal market’s defaults, the SEC said.
To make trading more transparent, the SEC suggested that dealers publicly disclose the yield spreads -- or difference against a benchmark -- on trades and argued for broader dissemination of bid and ask quotes for bonds.
The Bond Dealers of America, a Washington-based group that lobbies on behalf of securities firms, said any changes must avoid market disruptions.
“It is critically important to ensure any new regulations are carefully weighed in terms of their costs, as well as their potential benefits,” the group said in a statement.