The Big Three municipal bond regulators -- the Securities and Exchange Commission, the Municipal Securities Rulemaking Board, and the National Association of Securities Dealers -- made extensive reports to Congress last week, and they all called for change. The efficient functioning and reputation of the municipal bond market are at stake.
When the dust settled, however, no one was sure just what changes will be made and which changes will be made first. The changes have yet to come into sharp focus. Regulators are dissatisfied with the information that municipal issuers disclose. They are dissatisfied with information on secondary-market bond prices. And they don't like the way bond underwriters make political contributions to get business. Three valid criticisms.
We've had bond-related scandals recently in Louisiana, Massachusetts, New Jersey, and New York, and a bond-related court trial in Kentucky -- enough to cause Congress to ask for the reports. Last Thursday, Congress held hearings, and Rep. Edward Markey, the Massachusetts Democrat who heads the House subcommittee overseeing the muni market, said he saw a "high probability" that new laws would be written.
For all this work, the exact shape of new regulations and legislation remains murky. Regulators want more disclosure, but governments issuing bonds don't want to disclose more. Regulators want to get rid of the Tower amendment, which exempts governments from corporate-type disclosure requirements, but states and cities, understandably enough, want to keep Tower. The issue, SEC Chairman Arthur Levitt says, isn't worth a political war.
What's to be disclosed has been left vague. States and cities are not corporations, and they don't issue quarterly reports. Government financial officers and accountants are working to standardize reports, but their work is far from complete.
Political contributions from underwriters will die if contributions are disclosed and the information is easy to find, but issuers and bankers disagree on who should disclose the payments.
Municipal bond prices are tough. Too many issues, too many maturities, too few actively traded bonds. Yet the market will benefit from more widespread publication of price information, and it will doubtless come about, fostered by regulators and far-seeing dealers, and made possible by modern information processing systems.
Last week's reports were good. More precise proposals must come next.
