A Call for Action : An Analysis of the Impending Regulatory Crisis in the Municipal Securities Market

This Article warns of an impending regulatory crisis in the municipal securities market. The municipal securities market is an integral tool that allows state and local governments to implement important public interest projects by appealing to retail investors seeking tax-exempt income. Its regulation has garnered little attention – aside from the market's characterization as “sleepy.” However, the market has grown exponentially and today's market is increasingly populated with complex financial instruments. Quite simply, its regulation has not kept pace with developments in the market. Municipal securities issuers are not subject to the general registration requirements of the Securities Act of 1933 and Securities Exchange Act of 1934. And, the Tower Amendment broadly curtails efficient regulation in the municipal securities market. Thus, regulators are hamstrung in their efforts to ensure investor protection and disclosure. As a result, municipal securities regulation is applied through the “backdoor” with rules aimed at brokers, dealers, and underwriters that participate in the market. After examining the faultiness of such a regulatory structure, this Article analyzes the increasing stresses on the municipal securities market. Investors face growing default risk as state and local governments face increasing financial stresses. Also, there is mounting evidence that the “backdoor” regulatory approach is failing to provide investors with adequate disclosure. The sparse regulatory enforcement in the market verifies the regime's inadequacies. Lastly, even if the existing regime were to be enforced in court, this Article argues that the Tower Amendment would likely render some of the disclosure requirements invalid. Thus, this Article finds that the existing state of municipal securities regulation is grossly unacceptable and it concludes with a “call for action” to help curtail an impending regulatory crisis that seems but a matter of time