Group Calls for Federal Oversight of Municipal Bond Market

An industry group says the municipal bond market needs more federal oversight.  The call for more government regulation from the Municipal Securities Rulemaking Board (MSRB) comes as a massive federal investigation into bid rigging and other violations in the municipal bond market is gaining steam.

Last week, The New York Times reported  that various federal agencies and state attorneys general having been investigating possible collusion between banks and other companies that have helped state and local governments with municipal bond deals.  Though the agencies involved – including the Securities and Exchange Commission and the Justice Department – would not release details of the probe to the Times, the paper’s report said a variety of evidence collected so far indicated companies did not engage in open competition for municipal bond business, “but secretly divided it among themselves”. The results, The Times said, was added costs to taxpayers, and in some cases “exotic financial structures that blew up.”

The New York Times also reported that people involved in this investigation assert that such abuse of municipal bond contracts is widespread and has been going on for years.  On lawyer who is representing some of the municipal governments caught up in the probe told the Times it was  “one of the longest-running, most economically pervasive antitrust conspiracies ever to be uncovered in the U.S.”

In a statement issued last week, the MSRB – which is charged with self-regulation of the industry – said it lacked the authority to properly regulate the market. The board said that is limited to regulating the conduct of only the broker dealer community, and has “been unable to affect certain participants in the municipal market who are not registered, not licensed and not regulated by the MSRB, the SEC, the Federal Reserve, the Comptroller of the Currency, [the Financial Industry Regulatory Authority] or any other federal regulatory body.”

The MSRB called on President-elect Barack Obama and the new Congress to consider placing under federal regulation financial advisors, brokers of guaranteed investment contracts and other unregulated municipal market participants. “Specifically, we believe that these currently unregulated participants — such as Guaranteed Investment Contracts (GICs) brokers and the various financial advisors — should be brought under federal regulation in order that all segments, and not only broker-dealers, meet the high standards a fair municipal market that protects investors requires,” the board said in the statement.