Securities and Exchange Commission Enforcement Actions in the Municipal Securities Markets
Golden, Susan M., Government Finance Review
What is the SEC's role in regulation of municipal markets and what is involved in an SEC investigation?
Municipal securities are an important source of financing for state and local governments. The municipal securities markets enable these governments to borrow money economically to build facilities or otherwise finance operations. In recent years, the size of the municipal markets has grown dramatically. Today, there are more than 150,000 different issues of municipal securities outstanding, with a market capitalization well in excess of $1 trillion. Currently, more than 70 percent of the holders of these securities are individuals, whether holding directly or through mutual funds. Also, the municipal markets are both more liquid and more national in scope today.
SEC Role in Municipal Markets
The U.S. Securities and Exchange Commission (the Commission, or the SEC) is the independent regulatory agency charged with overseeing the nation's capital markets and administering the federal securities laws. The Commission has authority to make and enforce rules through civil enforcement actions and administrative proceedings. The Commission also has oversight authority over the Municipal Securities Rulemaking Board, the National Association of Securities Dealers, and other self-regulatory organizations (SROs).
The Commission plays a more limited role in the market for municipal securities than in other capital markets. For instance, unlike issuers of corporate securities, issuers of municipal securities are not subject to the registration and reporting provisions of the federal securities laws. The complex set of rules known as "line item" disclosure do not apply. The anti-fraud provisions of the federal securities laws, however, apply to any person participating in any securities transaction, including issuers of municipal securities.
The evidence available, including the historically low rate of default on municipal securities, shows that the majority of market participants have been playing by the rules; however, as demonstrated by the 20 proceedings recently brought by the SEC, this is not the case with all participants. Enforcement actions are a necessary part of the Commission's work in all capital markets, including the municipal market. The Commission's enforcement program is designed to protect investors and foster confidence by preserving the integrity and efficiency of the securities markets. As the GFOA and other organizations have stated:
Enhanced enforcement activity can do more to focus previously non-compliant issuers and underwriters on their responsibilities than any other.(1)
Recent SEC enforcement activity in the municipal securities market should be viewed in this perspective.
Conduct of Investigations
The Commission consists of five commissioners, appointed by the President and confirmed by the Senate. The commissioners serve staggered five-year terms and exercise rulemaking, enforcement, and adjudicatory powers. The SEC staff, which works for the Commission, is organized into offices (including general counsel and municipal securities) and divisions (corporation finance, enforcement, investment management, and market regulation). Generally, the commissioners vote on official actions of the Commission, with input from the staff.
The staff, through the division of enforcement either in the home office in Washington, D.C. or in a regional office, conducts fact-finding investigations to determine whether any violations of the federal securities laws have occurred, are occurring, or are likely to occur. Commission investigations are prompted by a variety of sources. In the municipal securities area, these include (but are not limited to) complaints from the public (including political opponents of an elected official, individuals who disagree with the use of proceeds, competitors of an underwriter, and former and/or current employees), news stories, referrals from other government agencies, other SEC investigations, market surveillance by either the Commission or an SRO, or by information gathered during an SEC or SRO inspection of a broker-dealer or other entity registered with the SEC or an SRO. …