SEC's Walter takes aim at 'second-class treatment' of muni investors

Rules for selling municipal bonds should afford investors protections similar to those in other U.S. markets, Securities and Exchange Commission member Elisse B. Walter said. Investors should be able to get “information that is not materially misleading and does not contain material omissions,” Walter said today at a San Francisco hearing. “That includes receiving financial and other material information that is not stale. As I have previously bemoaned, investors in municipal securities are, in certain respects, afforded second-class treatment.” The SEC is moving to remake regulations covering public officials and Wall Street underwriters who sell municipal bonds to investors. SEC Chairman Mary Schapiro in May said regulators should consider requiring more timely disclosure of financial information, adopting mandatory accounting standards and ensuring that borrowers such as real-estate developers who raise money through municipal entities provide adequate information to investors. The $2.8 trillion municipal market is used by cities, states and towns that back the bonds with taxes, as well as entities such as nursing homes, hospitals and real-estate developers that act through government agencies and default when the projects fail. Failed Monorail During the last three years, more than $17 billion of municipal bonds have defaulted, including those backed by Las Vegas' monorail and a toll road in South Carolina, according to Distressed Debt Securities Newsletter, a Miami Lakes, Florida publication that tracks defaults. Individual investors dominate the municipal bond market, holding more than $1 trillion directly and more through mutual funds. “In spite of their well-deserved reputation for safety, municipal securities can and do default,” Walter said. Schapiro appointed Walter to lead the hearings on improving regulations for the municipal bond market. The San Francisco session is the first of six planned. Separately, the financial regulatory overhaul that President Barack Obama signed in July provided for a two-year study of municipal finance disclosure, including whether to scrap a 1975 law that prevents the SEC from imposing the same requirements on local governments that it does on corporations. The SEC has also established a special unit to bring municipal securities enforcement cases. No Single Approach California Treasurer Bill Lockyer, who also testified at today's hearings, cautioned regulators against a uniform approach, saying the rules should reflect the differences among the many government entities that raise money in the municipal market. Washington state Treasurer James McIntire also plans to speak against uniform issuance rules when he appears before the panel today, in part because they would impede smaller municipalities' access to the market, according to his spokesman, Chris McGann. Walter said new regulations would acknowledge the difference between the municipal and corporate securities markets. Municipal officials have opposed efforts to force them to file bond offering documents with the SEC before sales, as corporations must do with stock offerings. “Some have suggested looking to the corporate-disclosure scheme as a framework for municipal disclosure,” she said. “I believe that we can learn from the corporate world, but it is also essential that we recognize the differences in the municipal and corporate finance worlds and that we work together to evaluate what an appropriate framework for municipal-finance disclosure should be in the future.”