The Securities and Exchange Commission said in a report on Tuesday it would seek legislation to improve disclosure in the $3.7 trillion U.S. municipal bond market, which has largely escaped the same level of regulation as other U.S. capital markets.
The SEC's report, which was two years in the making, focuses on improving disclosures by states, cities and other debt issuers and on increasing investor protection.
The report was put together because of investor concerns about protection and access to timely information in the municipal market, said SEC Commissioner Elisse Walter.
There are more than a million different bonds outstanding and individual investors held 75 percent of that debt at the start of 2012. Various laws have limited the SEC's ability to oversee states and local issuers, leading to a hodgepodge of accounting techniques and financial disclosures available to investors weighing whether to purchase their debt.
The report is not an investigation of a particular market participant or product, Walter told reporters on a conference call Tuesday. It does, however, seek to address price discovery and price transparency in the marketplace, she said.
The muni market is largely illiquid, and most bonds do not trade on a daily basis, meaning the pricing of these bonds is largely determined by the banks and brokerages.
"One of the big issues in this market is the relative opacity compared to other markets and how much work we have to do to bring true transparency to this marketplace," Walter said.
The SEC enforces rules for the market that are written by a self-regulatory organization made up of banks, issuers and advisers called the Municipal Securities Rulemaking Board.
The MSRB is reviewing how several market indexes are prepared, including those published by Municipal Market Data, a Thomson Reuters company. The MMD benchmarks are used to set rates for the billions of dollars of bonds issued yearly by states, cities and other municipalities.
Thomson Reuters has been holding discussions with the SEC and MSRB in the course of their reviews of the muni market.
The SEC's report comes at a time when the board that writes the rules for the U.S. municipal bond market is looking at how several muni-market indexes are calculated, in the wake of the scandal involving the London Interbank Offering Rate, or LIBOR.
James Smith, CEO of Thomson Reuters Corp, said Tuesday on a conference call following the release of the company's quarterly earnings that "we get lots of questions just across the board on these issues and we are always very forthcoming and cooperative with all regulatory agencies on all the matters that they are investigating. But at this point we do not believe we have any exposure at this point at all."
How muni debt is priced in a largely illiquid market is being questioned in the wake of manipulation by a number of banks of the LIBOR rate, which is marginally used in the muni market.
"We heard the concerns voiced by many ... that investors in the municipal securities market don't have all the protections and access to information that they need," Walter said on the conference call.
The SEC said it is also looking to share information with the Internal Revenue Service on information from returns, audits and examinations of issuers.
Because municipal bonds are largely tax-exempt, they are a key asset for wealthy investors seeking good returns from a relatively safe investment.
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