The state of the municipal securities market.

• Author: Levitt, Arthur, Jr.
• Position: Forum - Column

Editor's note: The following remarks are excerpts from the testimony of Arthur Levitt, Jr. before the Subcommittee on Telecommunications and Finance of the U.S. House of Representatives' Committee on Energy and Commerce on September 9, 1993, and from a news conference on October 18, 1993.

While the commission remains confident of the strength and effectiveness of the municipal securities market, we also share the subcommittee's concern that investor confidence in its integrity may have been impaired as a result of recent serious allegations of abusive practices. This market, which has fueled the growth of America's infrastructure, has many positive attributes that should be fostered. Nevertheless, there also are certain negative aspects that work against investor interests, which must be reformed. I am convinced that the various entities that play a role in overseeing this market must work together to ensure that the municipal market is fair and efficient, while remaining constantly mindful of the costs borne by market participants.

In brief, I believe the key to reform of the municipal securities business is more hard information: more information about issuers so investors can better evaluate the value of their securities, more information about the market so investors can obtain fair prices and more information about transactions so regulators can do their job better. I recognize that information gathering and dissemination imposes direct and indirect costs. Thus, we must ensure that such information is obtained and disseminated in a cost-effective manner.

The Municipal Securities Market Today

It has been almost 20 years since Congress last enacted legislative reform to address problems in the municipal securities market. Since the 1975 amendments |to the securities law~, much has changed. Ownership of municipal bonds once was heavily concentrated in the portfolios of banks, insurance companies and other institutions. Today, retail investors, holding both directly and through mutual funds and other intermediaries, increasingly depend on municipal securities to provide a secure, tax-exempt source of income. Households now account for the largest ownership share of any investor group in the market.

Increasingly, retail ownership has been accompanied by an explosion in volume. Investors now hold in excess of $1.2 trillion in outstanding principal amount of securities issued by approximately 50,000 state and local issuers. In 1992 alone, volume reached a record $235 billion, and this record is well on its way to being broken this year....

Municipal Broker/Dealer Market Practices

In recent months, several separate incidents of alleged abusive practices in the municipal market have received significant publicity. Media reports describe how municipal securities dealers have allegedly paid political figures and other parties to obtain underwriting business in municipal offerings.

These reports are substantial enough to call into question not only the business practices of municipal underwriters but also the integrity of the municipal securities market as a whole. Although our review has not been completed, we are carefully looking at these practices with a...