WASHINGTON — Securities and Exchange Commission member Michael Piwowar wants to explore the possibility of simplifying and standardizing municipal bond deals, because he believes that overly-complex transactions are contributing to muni market opacity and higher issuance costs.
Piwowar raised the issue in a speech at the 2014 Municipal Finance Conference in Boston Friday. The Republican commissioner has been a vocal advocate of making retail investor-friendly improvements to the muni market since joining the SEC last year. Recommendations from the SEC's 2012 muni market report have been an especial interest of Piwowar's, but his latest suggestion is a look far beyond retail investors and gets at the heart of the market's structure,
"This is an area that continues to puzzle me," said Piwowar, who studied the structure of the muni market during a previous stint as an SEC economist. "Despite the potential benefits of increased standardization for both investors and issuers, municipalities continue to issue exceedingly complex bond offerings. The complexity of these offerings is frequently mentioned as one reason why municipal securities do not trade on exchanges, which would provide pre-trade price transparency to retail investors."
Piwowar said that his study of the muni market led him to become fascinated by its complexity, noting that many municipal bonds transactions include features like sinking funds, special redemption provisions, and credit enhancements. His studies revealed that bond transaction costs increase with complexity, "suggesting that investors and issuers might benefit if issuers could issue simpler bonds."
"I recognize that municipal issuers face unique legal and tax considerations that can influence the design of municipal securities, and therefore may limit their ability to make offerings as simple as they might desire," Piwowar told conference attendees. "At the same time, improvements to liquidity from issuing simpler bonds should result in higher valuations and lower issuance costs. These factors alone should help drive the municipal bond market towards greater standardization rather than into the complexity that we see in current issuances."
Piwowar said he wants input from market participants on the issue.
"This contradictory result merits further attention, particularly given the potential for decreased costs, increased liquidity, and increased transparency that could result from greater standardization in the municipal bond market," he said. "I look forward to receiving feedback from all interested parties regarding what should be done to address this challenging problem."
The commissioner also spoke about recent regulatory activity, including the Municipal Securities Rulemaking Board's work to adopt a best execution standard and municipal advisor rules.
Piwowar also said he is pleased that the MSRB and the Financial Industry Regulatory Authority are at work on ways to require dealers to disclose their markups on so-called riskless principal transactions that occur when a dealer almost simultaneously purchases and sells a security. He commented on the SEC's July 31 announcement that it would extend the timeline for issuers to participate in its disclosure violations self-reporting program from Sept. 10 to Dec. 1. That change reflected SEC response to "widespread concerns" in the market, he said.
"To the extent that you identify further issues of concern, I encourage you to continue to raise them with the staff, as they have assured me that they remain ready and willing to discuss your questions and provide clarity wherever possible," Piwowar said.
