The Securities and Exchange Commission is stepping up its involvement in the municipal bond business, and the municipal bond business doesn't seem to grasp that its world is changing. Questions keep popping up.

Deeper SEC involvement shouldn't be surprising because the interstate market for state and city and other local government bonds has become huge -- $1.2 trillion at latest count -- and its cast of players has shifted from banks and casualty insurance companies to individual investors or their surrogates, the mutual funds and unit investment trusts. It's pretty hard for the SEC not to pay more attention to municipal bonds, given these strong underlying trends.

Last Thursday, Gary Sundick, associate director of the SEC's division of enforcement, revealed that the commission expects to begin examining sales practices in the tax-exempt bond market. He also listed the areas that the SEC has been known to be investigating political contributions, consultant fees, conflicts of interest, and disclosure.

"The basic premise behind these inquiries," Sundick told a meeting of the National Association of Bond Lawyers, "is that the integrity of the municipal securities market is largely dependent on the efforts of the underwriters in structuring transactions and preparing disclosure documents." Then he added that selection of underwriters should be "based on expertise and competence and not on political contributions."

This thoroughgoing examination by the SEC is warranted, and it is too early in the game to say what changes will be wrought. Political contributions have been curtailed but questionable practices remain. No one has figured out how politicians will replace bond money, nor has anyone attacked the problem of other contributors who seek to influence government finance officials. Why, for example, should a bond underwriter be curbed while a street-paving company can continue to make campaign gifts? Campaign finance must be attacked broadly.

Under new rules, municipal bond issuers face strictures that corporate bond issuers do not. Municipal bond underwriters must refrain from wining and dining city treasures, but corporate bond underwriters may pay for four-star restaurants and Broadway shows for corporate treasurers. If the muni ban is aimed at protecting investors, the difference is hard to understand.

Selection of underwriters, as Gary Sundick stated, should be based on expertise and competence and not on gifts. The goal here is to maintain the integrity of securities markets, but it's tough to maintain market integrity without upright people. Perhaps gift-giving should be attacked all across the markets. As we said, questions keep popping up.

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