The SEC’s Offices of Investor Education and Advocacy and Municipal Securities are issuing a series of three Investor Bulletins to help educate investors about the municipal securities market. This Bulletin provides an overview of the municipal securities market, including the different types of municipal issuers, how the municipal securities market is regulated, and what types of disclosures investors may be able to obtain about municipal securities.
Overview of the Municipal Securities Market
The municipal securities market plays an important role in our daily lives. State and local governments issue debt securities referred to as “municipal securities” or “municipal bonds” to borrow money and finance a wide variety of public projects, including the building and maintenance of our nation’s infrastructure. Municipal securities also can provide funds for day-to-day government needs and financing for projects undertaken by private entities such as hospitals, colleges, power and energy companies, and multi-family housing developers.
The roughly $4 trillion municipal securities market is very diverse. Issuers of municipal securities include states, their political subdivisions (such as cities, towns, counties, and school districts), their agencies and instrumentalities (such as housing, health care, airport, port, and economic development authorities and agencies) and U.S. territories (such as the U.S. Virgin Islands, Guam, and Puerto Rico). Currently, there are over 50,000 municipal issuers and approximately one million different municipal bonds outstanding. These municipal issuers range from the nation’s smallest villages, towns, and school districts to its largest cities, counties, and states. Each issuer brings unique borrowing needs to the municipal securities market and presents different credit risks to its investors.
Issuers of municipal securities are public bodies, such as a state government, and are different in nature from private business enterprises. The laws of the relevant state or local government, including state constitutions, statutes, city and county charters, and municipal codes, govern all borrowing, including the issuance of municipal securities. These laws provide the framework for the “who, what, why, when, where, and how” of an issuance of municipal bonds. Generally, a bond issued in violation of these requirements is not a valid debt of the issuer and the issuer may not be required to repay it.
How is the Municipal Securities Market Regulated?
The federal securities law regulation of the municipal securities market differs from the securities regulation applicable to securities offered in the equity and corporate debt sectors of the U.S. capital markets. Municipal securities are exempt from federal securities registration and reporting requirements that apply to other securities being offered to the public. Federal laws prohibit the Commission from requiring a municipal issuer to file any application, document, or report with the Commission before the sale of the issuer’s securities.
Municipal securities are subject to the antifraud provisions of the federal securities laws. The Commission is authorized to bring enforcement actions against any person or entity, including municipal issuers, who violate these antifraud provisions. In addition, brokers, dealers, municipal securities dealers, and municipal advisors are required to register with the Commission and comply with the Commission’s rules. The Municipal Securities Rulemaking Board (MSRB), the Financial Industry Regulatory Authority (FINRA) and federal bank regulators also oversee aspects of the municipal securities market. The Commission approves MSRB rules regulating transactions in municipal securities by brokers, dealers, and municipal securities dealers and advice provided by municipal advisors. In addition to the Commission, FINRA and the federal bank regulators examine for compliance and enforce rules applicable to brokers, dealers, municipal securities dealers, and municipal advisors.
What types of Disclosures are Available for Municipal Securities?
What types of disclosures should investors in municipal securities expect when purchasing a municipal security? What types of disclosures should investors in municipal securities expect to have access to during the life of such securities? Where can investors find these disclosures?
The Commission has a rule that requires underwriters in most municipal securities offerings (subject to limited exceptions) to assure that municipal issuers will make information about themselves and their securities available both at the time of a municipal securities offering and on an ongoing basis.
When purchasing a municipal security, an investor can expect that a municipal issuer will prepare a disclosure document typically called the “official statement.” Generally, the underwriter must obtain an official statement from the municipal issuer, review it before commencing sales to investors, and distribute it to investors.
During the life of a municipal security, an investor can in most cases (subject to limited exceptions) expect that there will be certain continuing disclosures about the security and the issuer that the issuer has committed to provide pursuant to a contractual agreement or undertaking typically referred to as the “continuing disclosure agreement”. Under a continuing disclosure agreement, municipal issuers must (i) make annual disclosures, which must be provided at least annually but can choose in the agreement to provide them sooner or more frequently; and (ii) make material event disclosures, which must be provided within 10 business days after the occurrence of certain listed events. Generally, an underwriter must determine that the issuer has committed to provide this continuing disclosure before the underwriter may purchase or sell the issuer’s municipal securities.
For additional information on the type of information typically contained in an official statement and provided in continuing disclosures, please read our Investor Bulletin: Municipal Bonds – An Overview.
An investor can find both official statements and continuing disclosures online and free of charge through the MSRB’s Electronic Municipal Market Access system known as “EMMA” and available at https://emma.msrb.org. EMMA is the designated centralized disclosure repository for the electronic collection and availability of information about municipal securities.
Municipal Securities Investor Resources
More information about the SEC’s regulation of the municipal securities market is available online at the SEC’s Office of Municipal Securities website, summaries of SEC enforcement actions in the municipal securities market can be found here, and access to MSRB rule filings with the Commission is available here.
The MSRB also provides educational material on various topics related to municipal securities at its Education Center and EMMA websites that may be helpful to investors researching municipal bonds or seeking additional information.
For additional investor education information, see the SEC’s website for individual investors, Investor.gov.