The Securities and Exchange Commission and the Internal Revenue Service announced yesterday they have agreed to work together more closely to monitor and regulate municipal bonds — another signal that federal regulators have elevated the priority of the muni market.

At this same time, market participants said the formal memorandum of understanding between the SEC and IRS will likely be curtailed by the statutory prohibition against the IRS’ ability to share taxpayer information with others, including the SEC.

While a press release said the two groups would coordinate on muni enforcement matters, sources said the agreement is much broader than just enforcement. It also appears to be broader than a 1994 agreement between the two agencies that focused solely on enforcement matters.

While a copy of the agreement was not available at press time, sources said the agencies plan to establish a formal committee that will meet at least quarterly to discuss issues and trends, as well as coordinate on outreach and training.

The two agencies also may release joint reports in the future, according to an IRS official. 

The SEC is coordinating its efforts through its division of trading and markets, which includes the office of municipal securities headed by Martha Mahan Haines, while the IRS is coordinating its work through Clifford Gannett, head of the IRS’ tax-exempt bond office.

According to the press release, the MOU, signed by SEC chairwoman Mary Schapiro and IRS commissioner Doug Shulman, is designed to improve compliance with SEC and IRS rules and regulations over the $2.8 trillion muni market, which “continues to grow in complexity and size.”

The release also said the agencies will “develop strategies to enhance performance of their respective regulatory responsibilities.”

In addition, they will collaborate on educational “and other types” of outreach efforts.

“Through cooperative relationships like this, we are better positioned to protect investors and ensure they are getting the information they need when investing in municipal securities,” Schapiro said in the release.

“This [MOU] reflects the commitment both agencies have in using all means possible to ensure the municipal bond market operates in accordance with all the laws that govern it,” Shulman said.

While market participants noted the two agencies have met informally for years, one said the limitations on the IRS’ sharing of taxpayer information “remains a pain in the butt,” and noted the release indicates the agencies will only share “information as appropriate regarding market risks, practices, and events related to municipal securities, among other things.”

The prohibition against the IRS sharing taxpayer information was put in place following the development of President Richard Nixon’s so-called enemies list, which was used to harass perceived political opponents, sources said.

The tax law makes it a felony for IRS officials to share taxpayer information with outsiders.

The agreement seems to signal heightened interest by federal regulators in the muni market, following the SEC’s announcement in January that it had established five specialized enforcement units, including one dedicated to muni market and public pension-fund fraud.

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