It is difficult to overstate the importance of the municipal securities market. There is perhaps no other market that so profoundly influences the quality of our daily lives.
These were the first two sentences of Securities and Exchange Commissioner Luis A. Aguilar in his Statement on Making the Municipal Securities Market More Transparent, Liquid, and Fair.
In his speech Aguilar discusses the current state of regulation surrounding munis and the treatment of muni investors as "second class citizens". "The result", Aguilar says, "is a market that, in the view of many, is excessively opaque, illiquid, and decentralized." For investors, according to Aguilar, this translates into additional fees for both the issuer and the broker.
"In light of this" says Aguilar, "I am pleased that this past year witnessed a number of initiatives that will help to make our municipal securities market fairer and more transparent." What is Aguilar talking about:
- The Municipal Securities Rulemaking Board ("MSRB") proposed rules that clarify the fiduciary duties of municipal security advisors and require disclosure of reference price information for same-day principal trades,
- in December 2014, the SEC approved an MSRB rule making a "best execution standard" for muni dealers which should enhance pricing protection - even in markets that lack centralized trading platforms, like the muni market, broker-dealers must still seek to obtain the best possible price for clients; and,
- the Financial Industry Regulatory Authority ("FINRA") proposed new rules concerning best execution and the disclosure of reference price information.
Still, with such a diversity of bond types and offerings - 20x more than corporates - and continued strain on budgets at the state level, the muni market needs more than rules. The lack of a centralized exchange adds to the complexity, especially for retail investors.
One advance over the last few years is the Electronic Municipal Market Access portal or EMMA; it began serving as a central repository for municipal issuer disclosures in 2009. The website was created to increase liquidity and transparency via public, free access to information in the municipal securities market.
Another advance is the Municipalities Continuing Disclosure Cooperation Initiative ("MCDC") launched by the SEC's Enforcement Division in March of last year. The MCDC encourages issuers to self-regulate by self-reporting materially inaccurate statements. According to Commissioner Aguilar, the announcement of the initiative 'instilled "shock and awe" in issuers and underwriters alike'.
What else can be done? Commissioner Aguilar has 6 suggestions:
- Repeal of the Tower Amendment - No Muni should be exempt from registration and disclosure provisions of the SEC.
- Revise Rule 15c2-12 to Improve Municipal Issuers' Disclosures - This is an action that could change disclosure requirements at the Commission level without having to go to Congress.
- Revise Rule 15c2-12 - Update interpretive guidance regarding disclosure obligations.
- Improve Pre-Trade Price Transparency - The lack of price transparency is the root cause of many of the problems in the muni market.
- Improve Post-Trade Price Transparency - EMMA is aiding with this effort.
- Enhance Information Sharing - Under current law, the IRS cannot share tax return information with the SEC which hinders enforcement action.
Look for changes in these areas coming soon. The net effect should be lower pricing due to greater liquidity and lower incidence of fraud related to bad or misleading information.
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