Munis: Not Sexy but Still Important

By Lisa Valentine

Municipal securities are treated as second-class citizens and its time to give them some care and feeding, said Securities and Exchange Commission Commissioner Elisse Walter to a gathering of the Tenth Annual A.A. Sommer, Jr. Lecture on Corporate, Securities, and Financial Law last week at Fordham University in New York.

The muni market, which Walter defines as securities issues by states, cities, towns, counties, school districts and port authorities, is “enormous” and makes use of complex structured products and financial derivatives. In the early 1970s, the muni market had less than $49 billion in outstanding bonds. Today, the figure is about $2.8 trillion. Also, munis are no longer the domain of sophisticated institutional investors; many more individual investors are using munis.

Walter made the following recommendations for the muni market:

•    Improve timeliness and quality of disclosures.
•    Have the SEC work more closely with the Municipal Securities Rulemaking Board (MSRB) and Electronic Municipal Market Access (EMMA) centralized collection system.
•    Provide increased pre-trade transparency in the muni market.

On the legislative front, Walter suggested that the following occur:

•    Change the MSRB to include a majority public board and allow the organization to enforce its own rules, perhaps even legislating that enforcement and regulatory authority be combined into one agency rather than the current environments where MSRB create the rules and leans on the SEC and FINRA to enforce the rules.
•    Allow the SEC to apply registration and disclosure standards to non-government conduit borrowers that issue securities directly without using municipal issuers as conduits.
•    Give the SEC regulatory authority over all financial intermediaries and not just municipal brokers and dealers.
•    And the most far-reaching and politically unpopular change: to repeal Acts 33 and 34 of the Tower Amendment.

The Tower Amendment exempts municipal securities from certain requirements. While Walter clearly states that she’s not suggesting that municipal securities be treated exactly the same as corporate securities, munis should be required to provide more documentation and reporting. A tranched approach, where larger issuers must provide more disclosure than smaller issuers, makes sense.