WASHINGTON – The Securities and Exchange Commission’s Office of the Investor Advocate plans to make municipal market reform one of the five areas where it will “devote significant time and attention” in 2018, according to a report from the office released Thursday.

The report is one of two that SEC Investor Advocate Rick Fleming writes and files with the Senate Banking Committee and House Financial Services Committee every year. The Report on Objectives details the office’s primary objectives for the next year while a second report, usually released near the end of the calendar year, reports on the office’s activities and accomplishments in the preceding year.

Fleming said that the ongoing transition period within the SEC makes predicting areas of focus more difficult given a potential change in the policy priorities of incoming leaders like SEC chair Jay Clayton. However, he said that “given its importance to average Americans,” his office will continue its focus on municipal market reform in fiscal year 2018. The office has listed municipal market reform as a focus since fiscal year 2015.

The importance of the market to average Americans can be seen through recent Federal Reserve Board data that shows 43% of outstanding munis were held directly by individual investors as of the end of 2016 while another 24% were owned indirectly by retail investors through various funds, according to Fleming.

“The statistics show that individual investors continue to utilize municipal securities as a part of their investment and retirement strategies,” Fleming wrote.

SEC Investor Advocate Rick Fleming
SEC Investor Advocate Rick Fleming said that “given its importance to average Americans,” his office will continue its focus on municipal market reform in fiscal year 2018.

The investor advocate office’s focus will involve following muni-related regulatory developments from the SEC and Municipal Securities Rulemaking Board, according to Fleming.

In the past year, Fleming and his office reviewed the MSRB’s proposal to add an exception to its existing rule against trading below the minimum stated denominations for a particular municipal bond. Pushback from the market eventually led the MSRB to withdraw the proposal and agree to engage in more outreach with stakeholders.

The office also reviewed the SEC’s proposal to add two new material events to Securities and Exchange Act Rule 15c2-12 on municipal disclosure. The proposal would require event notices to be filed for a broad range of “financial obligations,” if material, including guarantees, leases, derivatives, and monetary obligations resulting from a judicial, administrative or arbitration proceeding. It would also require such notices to be filed for actions and events related to financial obligations that “reflect financial difficulties,” such as a modification of terms or an acceleration.

Market participants were generally divided in comment letters submitted in early May with analysts and investors welcoming largely welcoming the proposed addition and dealers, municipal advisors, and issuers saying the proposal was too vague and would come with too many burdens on market participants.

“In FY 2018, the Office of the Investor Advocate will follow these developments and provide our recommendations as appropriate,” Fleming wrote. “In addition, we will continue to advocate for improved transparency and liquidity in the municipal securities market by encouraging timely, useful disclosures for investors and market participants, and we anticipate supporting appropriate enhancements to the MSRB’s [EMMA] website.”

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