SEC Looks Into Muni Changes and Public Hearings

I wonder why? Could it be this, or this, perhaps this, maybe this?

(Bond Buyer) WASHINGTON — The Securities and Exchange Commission is launching a nationwide inquiry into the municipal market that will lead to recommendations for specific statutory and regulatory changes to better protect investors, an SEC official said at the Investment Company Institute general membership meeting here Friday.

SEC chairman Mary Schapiro has tapped commissioner Elisse Walter to hold a series of public hearings across the country to solicit ideas from a wide range of individuals who have experienced the market from many different perspectives, Andrew “Buddy” Donohue, director of the investment management division, said in a speech he ­delivered for ­Schapiro, who did not appear at the meeting because she was tied up with Thursday’s steep stock market drop.

In her written keynote speech, which focused entirely on municipal securities, Schapiro made clear that the SEC wants public input on “designing a regulatory regime specifically for the needs of the municipal securities market” in an effort to go beyond its current disclosure and other proposals for the market.

She also called for the Municipal Securities Rulemaking Board to scrap its controversial Rule G-23 and prohibit broker-dealers from serving as both financial adviser and underwriter in the same municipal bond deal. The rule allows a dealer to switch from the FA to the underwriter role in a bond transaction as long as they disclose possible conflicts of interest and their expected compensation to the issuer. But Schapiro’s speech said: “This is a classic example of conflict of interest… The board should change G-23 and forbid this practice.”

I would be derelict in not pointing out that many muni-bonds have been good investments for the communities who floated them, and the people who bought them, but .......

Schapiro singled out Jefferson County, Ala., whose heavy reliance on VRDOs and interest rate swaps, she said, resulted in a default of $3.8 billion of sewer bonds and “the real possibility of the largest municipal bankruptcy in U.S. history.” Including the county, there were 136 defaults in municipal securities totaling more than $7.5 billion in 2008, “which cannot be ignored,” she said.

Oh well, I am sure there will never be a bubble or anything. By the way, if you don't think this affects your investment chew on this nugget:

The muni market today — in which retail investors, directly or indirectly through mutual funds, hold 69% of $2.8 trillion of muni debt outstanding — is dramatically larger and more complex than the market in 1945 when there was less than $20 billion of state and local debt outstanding.

Yup, in some way or other you probably have a stake in the muni-market.