In its recently-released Report on the Municipal Securities Market, the Securities and Exchange Commission asked Congress to increase the SEC’s authority to regulate the municipal securities market, which it described as “decentralized . . . illiquid and opaque.” While the SEC has brought a handful of enforcement actions against issuers of municipal securities based on allegedly-misleading offering materials, most recently against the state of New Jersey in 2010 and the city of San Diego in 2006, it has done so rarely because municipal securities are exempted from most of the provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.

In furtherance of its mission “to protect investors . . . including investors in municipal securities,” the Commission conducted a two-year review of the $3.7 trillion municipal securities market, existing regulatory structure, and disclosure practices. The primary concern identified by the SEC in its consequent report related to the “timeliness and completeness” of disclosures by municipal issuers. To address the problem, the SEC suggested that Congress grant it the authority to set (and also to enforce) minimum disclosure requirements—both substantive and procedural—that would apply to issuers of municipal securities. A related suggestion asked for authorization to “establish the form and content of financial statement for municipal issuers” and for the authority to designate and oversee a private-sector body that would set the standards by which those financial statements would be measured. The SEC further requested that it be granted the power to require issuers of municipal securities to have their financial statements audited.

Another possibility outlined by the SEC is that it may make amendments to Exchange Act Rule 15c2-12, which applies to municipal securities dealers, in order to require more specific and frequent disclosures in municipal securities official statements.

As stated by the Commission, “[d]espite 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.” If the SEC’s recommendations are adopted, that may no longer be the case.