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SEC tackles muni bond regulation

  Law Center  -   POSTED: 2007/07/19 10:04

Christopher Cox, chairman of the Securities and Exchange Commission, on Wednesday addressed a yawning gap in regulation of the $2,400bn US municipal bond market by calling for laws to broaden investor disclosures and giving the SEC oversight over the bond accounting standards body.
The effort is designed to address what Mr Cox said was the "second class" treatment of investors in municipal bonds – or "munis" – due to outdated regulations. Municipal bonds are issued largely by cities in the US to finance infrastructure and other public services.

The market was relatively small at the time the regulations were established in the 1930s.

But it has grown exponentially in recent years, with more than $2,400bn in municipal securities outstanding – more than the gross domestic product of China, according to the SEC.

Last year alone, more than $430bn in new municipal bonds were issued, about the size of the US defence budget.

Up to another third of the market is held indirectly through money market funds, mutual funds, and closed-end funds.

Yet the SEC's authority is limited to enforcing the anti-fraud provisions of US securities laws in the trading of munis.

Unlike in the corporate bond and other securities markets, the regulator's remit does not extend to assessing disclosures by muni bond issuers to ensure they are transparent.

Last year the city of San Diego was sanctioned by the SEC for having hidden billions of dollars in projected pension and healthcare liabilities to investors in its municipal bonds in the biggest case of such fraud since the late 1990s.

Saying there was an "urgent need" to improve the quality and the availability of disclosure documents, Mr Cox said: "One would think, given the size and importance of this market, and the prevalence of individual investors and older Americans in muni trading and investing, that investors in municipal bonds can rest assured that their interests are fully protected by the same high standards that operate everywhere else in the US capital markets. Not exactly. And not even close."

"The fact is, even large issuers of municipal securities generally don't have policies and procedures to ensure accurate disclosure," Mr Cox told a town hall meeting in Los Angeles.

He suggested that legislation establish a "limited regulatory regime" that would provide that the offering the offering documents and periodic reports provided to investors contain information similar to what they were accustomed to seeing for other securities they own.

It could also mandate that issuers of municipal bonds use US Gaap accounting standards, and give the SEC oversight of the Governmental Accounting Standards Board (GASB).

"A cornerstone of reform in this area would be to ensure that private companies who access the municipal market indirectly by using municipal issuers as conduits will meet the same requirements that municipal issuers themselves must meet," Mr Cox said.

The move is the latest example of attempts by US regulators to update rules governing securities issuance in place since the 1930s. Such rules are among a host of issues blamed for holding back the competitiveness of the US capital markets.

Vito Fossella, a republican congressman from New York, welcomed Mr Cox's initiatives, saying: "The quality and timely disclosure of the financials of muni issuers has been lacking. There needs to be greater transparency to protect investors, stop fraud and prevent a recurrence of the near defaults we've seen in recent years."


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