The U.S. public policy spotlight shined brightly and consistently on the municipal securities market during 2012. Detailed reports from regulators, legislative hearings, ongoing rulemaking activity by the Municipal Securities Rulemaking Board and wrangling over the tax code kept municipal market participants on their toes and transparency emerged as a key theme driving regulatory change. Notable regulatory developments included:
Muni Market Regulator Reports
The Securities and Exchange Commission and the Government Accountability Office published extensive reports on the municipal securities market. Both provided recommendations aimed at increasing the frequency, granularity and consistency of issuer disclosures. The SEC's report also focused on market structure and industry options for enhancing pre- and post-trade transparency and promoting fair access to price information for municipal securities, as the SEC, FINRA and other regulators continue to advance mandates for fair pricing and "best execution." While these reports offered ways to improve the timeliness, consistency and comparability of municipal disclosures, those potential benefits will need to be balanced against higher costs that municipal issuers may incur in complying with more frequent and granular disclosures as well as the strain on already limited resources that such changes could pose for both regulators and municipal issuers.
The Dodd-Frank Act and Municipal Finance
The market also saw Dodd-Frank rule making progress. In particular, the Dodd-Frank's explicit requirement that "municipal advisors" (as broadly defined by the Act) register with both the SEC and MSRB came under scrutiny. Interpretation issues in connection with the SEC's proposed definition of "municipal advisors" resulted in two extensions to the temporary registration regime in 2012 while attempting to finalize the rules. The commission plans to clarify its proposal to establish a permanent municipal advisor registration program well before its September 2013 deadline.
The Dodd-Frank Act's "Volcker Rule," which aims to ban banks from proprietary trading, also made waves in the municipal market. Although the Volcker Rule includes an exemption for municipal securities, the term was defined narrowly and does not currently exempt debt issued by municipal agencies. Market participants expressed concern that this omission could constrain demand for agency-issued debt going forward, thereby increasing borrowing costs.
From the MSRB
Along with proposing new rules and rule changes during 2012, the MSRB continued to expand the capabilities of its Electronic Municipal Market Access system in line with the board's new long-range plan that was unveiled last year. In terms of issuer disclosures made available on EMMA, the Board's August 2012 report found that the type and number of continuing disclosure documents for municipal securities submitted to EMMA has been climbing for most types of disclosures.
In terms of new and proposed rules, the MSRB sought comment on the potential elimination of large trade size masking on price transparency reports. The MSRB is seeing progress with issuer-driven transparency. The MSRB closed out the year by soliciting comments to determine whether any rules or related interpretive guidance should be revised or restated.
Also of interest was the MSRB's December 2012 implementation of a new rule, G-43, that clarifies the obligations of broker's brokers to make a reasonable effort to obtain a price that is fair and reasonable in relation to prevailing market conditions, establishes practices with respect to the conduct of "bid-wanteds," and reaffirms that selling dealers and bidding dealers interacting with broker's brokers have fair pricing duties.
On a related note, an MSRB official recently stated that the agency is considering a "best execution" rule within the next 12 months, and noted FINRA's new best execution rule, Rule 5310, as a potential influence.
While fiscal cliff-related tax increases and potential across-the-board federal spending cuts dominated the mainstream headlines to close out 2012, the tense negotiations also weighed heavily on the muni markets. While Congress and the White House wrestled over the fiscal cliff, investors yanked $2.3 billion out of municipal bond mutual funds in the week ended December 20 and 30-year Aaa G.O. benchmark yields rose from 2.48% on December 3 to 2.86% on December 18 (The yield stands at 2.74% as of January 14.)
The American Taxpayer Relief Act of 2012 signed January 2 by President Obama ultimately maintained the preferential tax treatment for muni bond income and any change to curtail those tax benefits could have significantly raised borrowing costs for municipal issuers. Several other provisions also were mildly positive for the muni market.
As we refine our expectations for 2013, we anticipate that regulatory change will continue, including (but not limited to) the array of issues and rules that gained prominence during 2012.
Andrew Kramer is senior director, corporate
development & investor relations for Interactive Data.