SEC to weigh tougher muni oversight soon

By Lisa Lambert

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission will begin weighing tougher oversight of the municipal bond market this summer and may seek authority from Congress to regulate the market more closely, the SEC's chief said on Tuesday.

"I do think that it's appropriate for the purchasers of municipal bonds to have the same kind of quality of disclosure that those who buy corporate bonds get," SEC Chairman Mary Schapiro told the Reuters Global Financial Regulation Summit.

"This is going to require legislative changes, obviously, and we are considering whether to seek legislative authority in this area and whether that would be appropriate."

Any moves to expand federal regulation of the muni bond market "would be controversial," Schapiro acknowledged.

The SEC will turn its attention to so-called "pay-to-play" rules meant to ensure that broker-dealers do not receive kickbacks from municipal bond issuers and to regulation of investment advisors.

The Municipal Securities Rulemaking Board, a self-regulatory organization made up of market participants, currently writes the rules that the SEC enforces. Even then, the SEC only can apply the rules guiding broker-dealers because federal law prohibits the agency from directly regulating bond issuance.

Calling municipal bonds critically important to the country and the economy, Schapiro said that "some of the enforcement things we have seen have been really appalling and really suggested for us to look at whether the regulatory umbrella that is there is sufficient."

Most notably, the state of New York and the SEC are investigating if private equity fund Quadrangle won investments from New York City and state pension funds through a pay-to-play scheme.