SEC wants more disclosure in muni bond market

SEC wants more disclosure in muni bond market
By Nicole Bullock in New York
Copyright The Financial Times Limited 2009
Published: July 16 2009 01:37 | Last updated: July 16 2009 01:37
http://www.ft.com/cms/s/0/a03de444-7198-11de-a821-00144feabdc0.html


US regulators, which are stepping up oversight across the financial markets, are also pushing for greater transparency for municipal bonds.

The Securities and Exchange Commission voted unaniminously on Wednesday to propose that issuers in the $2,700bn municipal market be required to disclose more information to investors.

‘’Currently there is a disparity between the level of information available to investors in municipal securities versus information available to investors in corporate securities,’’ said SEC chairman Mary Schapiro.

The SEC does not directly regulate the muni bond market, but it does have authority over the broker-dealers that transact the securities.

The regulator wants to expand a rule that now prohibits brokers, dealers and municipal securities dealers from buying or selling municipal securities unless they reasonably have determined that key information about these securities will be available to investors on an ongoing basis.

Ms Schapiro said that while the proposal is an step to address the ‘’disclosure disparity’, more needs to be done. At an open meeting of the commission, the chairman signaled that she plans to work with Congress for more authority over disclosure related to municipal securities.

State and local governments raise money with municipal bonds to fund projects benefitting the public good. The interest income is exempt from certain taxes in the US.

The more than 50,000 different muni issuers run the gamut from the state of California to tiny counties and school districts. This diffuse and sometimes murky nature of the market can make it hard for its investors, many of whom are wealthy US individuals drawn by the tax breaks, to analyze the securities.

The muni market ran into trouble in the last few years when bond insurers, which guaranteed about half of the market, lost their top notch credit ratings. The removal of the triple-A guarantee produced a chain reaction for some issuers that exposed derivatives and other debt arrangements used by muni issuers to be riskier than previously thought.

The SEC proposal would expand the current disclosure rule to include instruments known as variable rate demand obligations, which accounted for about 38 per cent of muni trading last year.

Issuers would also be required to make information on events like tender offers, ratings changes, payment delinquencies and unscheduled payments out of debt reserves available to investors in a timely manner.