[ by Howard Haykin ] The SEC issued Tuesday a comprehensive report with recommendations to help improve the structure of the municipal securities market and enhance disclosures provided to investors.  The report is the culmination of an extensive 2-year review of this $3.7 trillion market, initiated by SEC Chairman Mary Schapiro in mid-2010 and led by SEC Commissioner Elisse Walter. The recommendations address concerns raised by market participants and others in public field hearings and meetings with Commissioner Walter and SEC staff as well as the public comment process during the agency’s review of the municipal securities market. "The municipal securities market is the bedrock for funding of local government projects throughout our country.   It is essential that the market work well and that investors have confidence in it,” said Chairman Schapiro.   "While we have put in place measures to help investors make more knowledgeable decisions about municipal securities, we could do more for investors with statutory authority to improve disclosure and muni market practices." Commissioner Walter noted that the report "brings into clear focus the current state of the municipal securities market and recommends potential action to address issues raised by investors, issuers, and other market participants.  I look forward to moving forward with the efforts articulated in our report to further strengthen and enhance this vital market.” At the start of 2012, there were more than one million different municipal bonds outstanding totaling $3.7 trillion, with 75% held by individual "retail" investors.  Yet, despite its size and importance, the municipal securities market has not been subject to the same level of regulation as other sectors of the U.S. capital markets due to broad exemptions under federal securities laws for municipal securities. Recommendation Type 1. Potential Legislative Changes. Lacking a statutory regime, the SEC has been limited in how much it can do to protect individual investors.  The SEC report discusses potential legislative changes that could help improve disclosures to investors - e.g., the report recommends that Congress consider authorizing the SEC to set baseline disclosure standards and require municipal issuers to have audited financial statements. Recommendation Type 2. More Legislation. Other potential legislative changes recommended in the report to help improve disclosures and practices in the municipal securities market include:

• Eliminating the availability of Securities Act and Exchange Act exemptions for conduit borrowers who are not municipal entities.
• Authorizing the SEC to establish the form and content of financial statements for municipal issuers who issue municipal securities, and to recognize a designated private-sector body as the standard setter for generally accepted for federal securities law purposes.
• Providing a safe harbor from private liability for forward-looking statements of repeat municipal issuers that satisfy certain conditions.
• Permitting the IRS to share information with the SEC that it obtains from returns, audits, and examinations related to municipal securities offerings, particularly in instances of suspected securities fraud.
• Providing a mechanism, through trustees or other entities, to enforce compliance with continuing disclosure agreements and other obligations of municipal issuers to protect municipal securities bondholders.

Recommendation Types 3+4. Rulemaking & Best Practices. In addition to potential legislation, the SEC’s report identifies potential rulemaking by the SEC or the MSRB and enhancement of best practices by the municipal securities industry. Disclosure Issues in SEC Report. The SEC’s report discusses several disclosure issues including: (i) timing and content of financial information; (ii) disclosures relating to pension and other post-employment benefit plans; (iii) derivatives use by issuers and obligated persons: (iv) conflicts of interest including pay-to-play practices. Recommendation Types 5. Structural Changes. The report also reviews the current structure of the municipal securities market and discusses potential initiatives to improve pre-trade and post-trade price transparency and support existing dealer pricing obligations. The report was prepared after substantial input from investors, investor advocates, market professionals, and representatives of municipal issuers – including those who participated in the SEC’s field hearings in San Francisco, Washington D.C., and Birmingham, Ala. For further details, go to:  [SEC PR 12-147, 7/31/12]. Additional Reference Materials:  [Report on the Municipal Securities Market] and [Commissioner Walter's Remarks on News Conference Call].