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PAD 536: Paper #2
Susanne Siebel
The municipal securities market in the United States is a $3.6 trillion industry that
generates funding for local capital projects such as hospitals, infrastructure, and other large
projects (SIFMA (a)). The market has a large influence over the types of projects that affect local
citizens on a daily basis, but the regulatory structure surrounding municipal securities is less
encompassing than other markets. For example, Commissioner Luis Aguilar from the Securities
and Exchange Commission (SEC) commented on municipal securities, claiming that the laws
influencing them receive “second-class treatment” and “individual investors at a distinct
disadvantage” (Aguilar). The municipal securities market has recently begun to generate
attention because of the 2008 financial crisis and its effect on governmental organizations.
Specifically, a pressing topic within the industry has been the implementation of continuing
disclosure requirements under the SEC’s Rule 15c2-12. Rule 15c2-12 requires obligated parties
(underwriters, broker-dealers, etc.) to continually submit pertinent financial documents in order
to keep investors current on information that could affect their investment (MSRB (b) 1). These
documents are required to be publically disclosed on the Municipal Securities Rulemaking
Board’s (MSRB) Electronic Municipal Market Access (EMMA) database. This web-based
system allows investors to research specific documents information and recently traded prices of
specific securities.
Continuing disclosure regulation within the municipal securities market contains positive
and negative attributes. The regulation is effective at providing the predominantly individual and
retail investor base with an unbiased resource (separate from their broker-dealer) to understand
the value of the security of interest. The increased level of free information can positively
improve efficiency within the municipal securities market. However, the low risk of defaults and

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the potential costs added to issuing entities could unintentionally harm the industry rather than
help enhance market efficiency and quality.
The continuing disclosure regulation on municipal securities has the potential to improve
the market because it allows participants to make more informed investment decisions, thus
creating a more efficient market. First, the current nature of the municipal securities market is
highly decentralized, forcing the individual and retail investors to mainly work through broker-
dealers. These broker-dealers possess market information that is not always released to the
average investor. This creates a situation of information asymmetry which causes the market to
work less efficiently than its potential. Continuing disclosure regulation facilitated by the
MSRB’s EMMA database aims to reduce inefficiency by requiring obligated parties to submit
financial information on a regular basis. This information allows users to independently research
their interested investment in order to understand the risks and rewards pertaining to them. Free-
flowing information allows markets to work more efficiently. Additionally, because EMMA is
simple to use, electronic web-based platform, the cost of using, implementing, and maintaining
has this database been at a reasonable level for MSRB. In Fiscal Year 2014, MSRB used “12,699
hours and at least $10,000 in hardware and software technology to maintain and improve their
web-based infrastructure” (MSRB 4).
Second, 70.6% of the municipal securities market is composed of retail and individual
investors (SIFMA (b)). The large portion of non-professional investors is very significant for a
market that has less regulation, protection, and free-flowing information that other sectors of the
securities market. Registration and disclosure requirements are set in place in order to protect
investors from making uninformed decisions. Because the municipal securities market has been
traditionally exempt from standard disclosure regulations, investors are more vulnerable than in

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other markets. The continuing disclosure regulation will provide protection in the form of
information for the less sophisticated investors that dominate this market.
Finally, municipal securities are traded less frequently after their initial issuance,
therefore current information about their fiscal status is needed for investors to avoid negative
changes in their position. In the municipal securities market, 61.5% of all trades occur within the
first five years of the life of the security (EMMA 16). The remaining 38.5% of the trades occur
in the last twenty years of the bond’s life providing substantial time for the financial health of the
issuing entity to change (EMMA 16). The trend of low trade volume after the initial offering
implies that municipal bonds are generally held by investors for long periods of time or until
maturity. Because of the long holding period of most securities, investors need to have a
convenient and easy outlet to check on the status of their investment. Additionally, it is important
to be alerted when securities are at risk of default because of the long duration of the outstanding
investment. The enforcement of continuing disclosure for the long term bonds allows investors to
stay informed on their investment. Without this type of documentation, investors would have a
hard time staying informed about their investment’s financial status.
While continuing disclosure documents allow investors to gain insight into the risks
associated with municipal securities, there are various concerns that disclosure requirements
incur more costs than benefits for all parties involved. First, when the Securities Exchange Act
was passed in 1933, the municipal securities market was exempt from the registration and
disclosure regulations. The SEC wanted to allow the municipal securities market to develop a
strong foundation for capital generation without imposing regulations that would add costs (SEC
(a)). There are concerns that the added cost of regulating the compliance of continuing disclosure
procedures would reduce the overall yield of an investment. Because the risk and level of return

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within the municipal securities market is relatively slim compared to other markets, added
regulatory costs could have a large effect on the participants and strength within the market.
Second, there are concerns that the blanket requirements for continuing disclosure are not
necessary for all the different types of municipal securities. For example, within the SEC’s
comprehensive report discussing the current status of the municipal securities sector, there are
concerns that overregulation can be counterproductive. Specifically, the report states that “given
the size and diversity of issuers in the municipal securities market, a ‘one-size-fits-all’ approach
to disclosure is neither necessary nor practicable…the amount and type of disclosure needed
depends, in part, on the type of credit involved and different risks associated with different
issues” (SEC (b) 64). This comment on continuing disclosure practices is aimed to focus
regulation in a productive manner and avoid implementing regulation for the sake of having
regulation. Stakeholders subscribing to this school of thought support the idea of using the
current regulations set in place and making it more effective.
Finally, the rate of default on municipal securities is one of the lowest among the fixed
income sector. The low default rates within the market prompts the question of the need for
continuing disclosure regulations. Default rates for municipal securities in 2014 totaled $9.02
billion, or 0.2% of the total outstanding bonds in the United States (Slavin). Further, Moody’s
Investors Service reported that even after the financial crisis in 2008, defaults in the municipal
securities market “remain extremely infrequent” (Moody’s Investors Service). The rate of default
is lower in municipal bonds than other fixed-income assets because the source of repayment is
mainly based on project specific revenue (revenue bonds) or the local tax base (general
obligation bonds) (EMMA (b)). Because of the low risk of default, critics of regulation believe

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that there is less of a need to force entities to publish financial information because investors
have such a high chance of receiving their full investment back.
Continuing disclosure and Rule 15c2-12 have created a forum for investors to access
public documents pertaining to their municipal security. The debate over implementing
continuing disclosure requirements results in different pros and cons. The requirement allows
investors to protect themselves from changes in their position and overly risky investments.
Additionally, continuing disclosure requirements allow the market to be on a path that is more
encompassing and efficient because of the extra information provided to consumers. However,
there are concerns over whether the regulation is truly necessary. The added costs of regulation
coupled with the safe nature of municipal securities force stakeholders to question if the push
towards more data is really needed. There is a balance that needs to be struck that allows the
market to be protected but allow room for sustainable growth. An effective municipal securities
market will improve the lives of everyday citizens.

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Work Cited
Aguilar, Luis A. “Statement on Making the Municipal Securities Market More Transparent,
Liquid, and Fair”. Securities and Exchange Commission, 13 Feb. 2015. Web. 1 May,
2015.
Electronic Municipal Market Access (EMMA) (a). “Municipal Securities Rulemaking Board
2014 Fact Book”. EMMA 2015. Web. 5 May, 2015.
http://www.msrb.org/msrb1/pdfs/MSRB-Fact-Book-2014.pdf
EMMA (b). “Par Amount Traded Based on Source of Repayment”. EMMA 7 May, 2015. Web. 7
May 2015. http://emma.msrb.org/MarketActivity/ViewStatistics.aspx
Moody’s Investor Service. “Announcement: Moody’s Municipal Bond Defaults Remain Low in
Number, but New Trends are Emerging”. Moody’s Investors Service, 7 May, 2014. Web.
30 April, 2015. https://www.moodys.com/research/Moodys-Municipal-bond-defaults-
remain-low-in-number-but-new--PR_298814
Municipal Securities Rulemaking Board (MSRB) (a). “RE: Request for Comment on Collection
of Information Provided for in Rule 15c2-12 under the Securities Exchange Act of 1934”.
MSRB, 20 Jan, 2015. Web. 1 May, 2015.
MSRB (b). “SEC Rule 12c2-12: Continuing Disclosure”. MSRB Jan, 2013. Web. 1 May, 2015.
Securities and Exchange Commission (SEC) (a). “Federal Securities Law”. Securities and
Exchange Commission. Securities and Exchange Commission, n.d.. Web. 1 May, 2015
http://www.sec.gov/about/laws.shtml
SEC (b). “Report on the Municipal Securities Market”. Securities and Exchange Commission.
Securities and Exchange Commission, 31 July, 2012. Web. 30 April, 2015.
Securities Industry and Financial Markets Association (SIFMA) (a). “US Bond Market Issuance
and Outstanding”. SIFMA, 16 March, 2015. Web. 30 April, 2015.
http://www.sifma.org/research/statistics.aspx
SIFMA (b). “US Municipal Securities Holders”. SIFMA, 30 April, 2015. Web. 19 March,
2015.
Slavin, Robert. “Defaults Reached Record in 2014”. The Bond Buyer, 13 Jan. 2015. Web. 30
April, 2015. http://www.bondbuyer.com/news/markets-buy-side/defaults-reached-record-
in-2014-1069491-1.html