Munis Get Tougher With Themselves

The municipal-bond market has long played by its own set of rules. Unlike corporations, city and state governments don't have to publish regular reports on their fiscal health, setting the stage for unpleasant surprises for investors. And Wall Street's campaign contributions to the local politicians who allocate bond-underwriting business raise questions about whether taxpayers always get the best deal.

Now, the $1.2 trillion muni market is trying to improve its image. Amid growing congressional criticism and a federal probe of the market, the Municipal Securities Rulemaking Board on Aug. 4 proposed new rules aimed at curbing abuses. One rule would require dealers to tell prospective muni-bond buyers which issues provide ongoing financial data--something that might pressure others to do so. The other would ban Wall Street firms and their employees from making campaign contributions expressly to win underwriting contracts. Those who get contracts would have to disclose relevant contributions. The MRSB "should ensure that such contributions do not play a role in the awarding of business," says Christopher A. Taylor, the MSRB's executive director.

BACK-SCRATCHING. Experts note the MSRB, a self-regulatory association of bond dealers, has no authority over bond issuers and lacks the power to change much. The proposals "don't go far enough," says Securities & Exchange Commissioner Richard Y. Roberts. "But given their jurisdictional restrictions, I'm not sure what else they could do."

Critics fear that the MSRB proposals would only prompt dealers to make other back-scratching arrangements. But further reform probably isn't in the cards: A 1975 law limits the federal government's ability to police muni-bond issuers, as well as their accountants, attorneys, and trustees. And despite the interest of key lawmakers such as House Energy & Commerce Committee Chairman John D. Dingell (D-Mich.), Congress is unlikely to wade into a thorny states' rights issue. For buyers of municipal securities, the operative motto remains caveat emptor.

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