With Renewed Focus, The Spotlight Shines On Municipal Bonds

America is built with bonds.

According to the National League of Cities, three-quarters of all U.S. investment in infrastructure is accomplished with tax-exempt bonds. In the decade spanning 2003 and 2012, a total of about $3.2 trillion in infrastructure investment was secured through long-term municipal bonds, reports the National Association of Counties. Those investments made thousands of roads, bridges, airports, intercoastal waterways, dams, and water systems a reality for Americans across the country.

The impressive size of this market demands that financial experts lend it careful consideration. At this year’s SIFMA Annual Meeting, a panel of market and regulatory leaders came together to assess where the bond market stands, how it can be improved, and why this is one of the most important discussions in finance today.

Regulating the massive municipal marketplace  

“A well-functioning municipal market is obviously critical to the infrastructure of the nation,” explained Andrew Ceresney, Director of the U.S. Securities and Exchange Commission’s Division of Enforcement. “This is obviously a critical area for us.”

Ceresney discussed, at length, how the SEC has recently turned their attention to more specialized enforcement units – including one that is focused on municipal securities, like tax-exempt bonds. According to Ceresney, the commission needs to devote attention to municipal bonds, but not only because of the sheer enormity of the marketplace. Since retail investors are the primary holders of these securities and issuers are often unsophisticated, a lack of regulation can create substantial risk.

“We certainly are upping our security in this area,” he said. “It’s fair to say that this is a place where we are here to stay, and I think you’re likely to see more enforcement, rather than less.”

A market that’s too large for one-size-fits-all  

“This is a market that is unique in the world in giving access to low cost capital to state and local governments to finance our nation’s critical infrastructure needs,” explained Kent Hiteshew, Office of State and Local Finance, U.S. Department of Treasury.

Unlike Ceresney, Hiteshew’s occupation is one of critical thinking, not regulation. The Office of State and Local Finance supplements existing Treasury efforts, working closely with offices of tax and economic policy to track development in the market, monitor distressed municipalities, and share best practices on a holistic level.

From Hiteshew’s perspective, the municipal bond market presents unique policy challenges.

“There are almost 50,000 issuers,” he said. “And they have been issued under more than 50 separate legal frameworks and state income tax exemptions.” That ensures that bonds can support risk management and a diverse set of investors, but it also leads to “one-size-fits-all regulatory challenges” that require creative market structure solutions.

“My advice is that the industry should be more cognizant of how the market is perceived by policymakers, and engage in the policy-making process,” Hiteshew said.

“Needless to say, the amount of regulation that we are dealing with in the municipal space is extensive,” said Chris Hamel, who, as Managing Director and Head of the Municipal Finance Group at RBC Capital Markets, manages 175 investment bankers in 26 cities. “It really touches every aspect of what we do.”

Hamel, who is also a Trustee of New York’s Citizen Budget Commission, believes that the level and focus of the regulation will alter the business model in the bond market. The focus for the financial industry, he believes, should be on spending energies on understanding where regulation is headed, and attempt to interpret those moves in a proactive fashion.

“That’s really our job,” Hamel explained.

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Leslie Norwood

Managing Director & Co-Head Municipal Division

Municipal Securities Division

SIFMA