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Regulating the Fixed Income Market in the United States. Felice B. Friedman OECD-World Bank Bond Market Forum 2-3 June 2003. Introduction and Background. The SEC and Debt Markets Two Myths to Debunk Debt markets as unregulated

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Regulating the fixed income market in the united states

Regulating the Fixed Income Market in the United States

Felice B. Friedman

OECD-World Bank Bond Market Forum

2-3 June 2003

Introduction and background
Introduction and Background

  • The SEC and Debt Markets

    • Two Myths to Debunk

      • Debt markets as unregulated

      • US as case study for “Developing an Efficient Regulatory Framework for Debt Markets”

Snapshot of us fixed income market
Snapshot of US Fixed Income Market

  • $20.2 trillion outstanding debt securities, year-end 2002

  • $11.7 trillion in equities, slightly more than half the debt market

$ trillions

Snapshot of us fixed income market1
Snapshot of US Fixed Income Market

  • Treasury Securities: $3.2 trillion

  • Federal Agency Debt: $2.4 trillion

  • Municipal Securities: $1.8 trillion

  • Corporate Debt: $4.1 trillion

  • Mortgage-backed: $4.7 trillion

  • Asset-backed: $1.5 trillion

  • Money Market: $2.6 trillion

Source: Bond Market Association

Framework of us debt market regulation
Framework of US Debt Market Regulation

  • Multiple Gov’t Agencies/ Regulators

    • US Department of the Treasury

    • Federal Reserve System

    • US Securities and Exchange Commission

    • Self-Regulatory Organizations

      • NYSE, NASD, MSRB

    • Office of Federal Housing Enterprise Oversight

Framework of us debt market regulation1
Framework of US Debt Market Regulation

  • Multiple Governing Laws – Crisis-driven rather than “designed”

    • Securities Act of 1933 and Securities Exchange Act of 1934. Established disclosure framework for regulation.

      • All securities offered to public must be registered with the SEC, unless exempt

        • Government and municipal securities exempted from registration and reporting requirements

      • No exemption from antifraud provisions

Regulation of municipal securities
Regulation of Municipal Securities

  • Securities Acts Amendments of 1975

    • Response to New York City financial crisis

      • Regulated broker-dealers; established the MSRB

  • Rule 15c2-12, adopted in 1989

    • Response to default of Washington Public Power Supply System (WHOOPS) in 1983

      • First bond disclosure rule

Regulation of government securities
Regulation of Government Securities

  • Government Securities Act of 1986

    • Response to failure of several key government securities dealers

      • Regulated broker-dealers

  • Government Securities Act Amendments of 1993

    • Response to Salomon Brothers “cornering” incident

      • Improvements in auction process

      • Development of sales practices rules for government securities markets

      • Large position record-keeping and reporting requirements

Regulation of corporate securities
Regulation of Corporate Securities

  • Corporate Debt Securities

    • Sarbanes-Oxley Act of 2002

      • Response to failures of Enron, WorldCom

      • Focus was equity and not debt, but disclosure remedies of Sarbanes-Oxley apply equally to issuers of debt as well as to issuers of equity

        • Regulatory framework for equity applied without independent consideration of debt market

What lessons can we draw
What Lessons Can We Draw?

  • Hodgepodge of Regulators

  • Hodgepodge of Laws and Rules

  • Why does it work? What’s key?

A closer look at the municipal securities market
A Closer Look at the Municipal Securities Market

  • Why the municipal securities market?

    • Financed the growth of the US

    • Has both public and private aspects

    • Highlights key regulatory elements

    • Demonstrates creativity in regulation

Snapshot of the municipal securities market
Snapshot of the Municipal Securities Market

  • Approx. $1.8 trillion sub-sovereign debt outstanding at year end 2002

  • Approx. $430 billion in municipal debt issued in 2002, about 75% long term. About 25% due to refinancing/ refunding

  • Over 50,000 issuers and 1.5 million different issues

Overview of municipal securities regulation
Overview of Municipal Securities Regulation

  • Historically

    • Exempt from registration and reporting requirements of Securities Act and Exchange Act

      • Reasons unique to United States

      • Low-risk investment

      • Institutional investor base

Overview of municipal securities regulation1
Overview of Municipal Securities Regulation

  • What changed?

    • Financial crisis in major municipalities

    • Changes in bankruptcy law in 1979

    • Cutbacks on federal aid to municipalities

    • Proliferation of new, untested financing techniques

    • Change in investor base

Regulation of municipal securities1
Regulation of Municipal Securities

  • Broker-Dealer Regulation

    • Securities Acts Amendments of 1975 established regulatory scheme for municipal securities broker-dealers

      • Added Section 15B to Exchange Act

    • Authorized SEC to set up an SRO

      • All MSRB rules approved by SEC

      • Inspection and enforcement authority with SEC, NASD, and FRBNY

Regulation of municipal securities2
Regulation of Municipal Securities

  • Disclosure Regulation

    • Rule 15c2-12 -- Imposes both primary and secondary market disclosure

      • Requires underwriter to obtain, file and distribute Official Statement

      • Underwriter must obtain from issuer a written agreement to make financial and operating information available on ongoing basis

  • Transparency Requirements

    • MSRB rules require transaction reporting for each security traded at least two times the previous day

  • Antifraud Regulation – and Enforcement

    • City of Miami, 2003

Issues to consider
Issues to Consider

  • Who should be the regulator?

    • Consider US example, or non-example

      • Functional regulation – How best to look after investor concerns?

        • Should the safety and soundness regulator be charged with disclosure requirements for public offerings?

      • Coordination among regulators – and self-regulators

Issues to consider1
Issues to Consider

  • Should there be a self-regulatory organization involved?

    • Sufficient government oversight

      • Balance between SRO and regulator: consider powers of MSRB vs. powers of NASD

Issues to consider2
Issues to Consider

  • Should offerings of debt securities be registered?

    • What is being offered?

      • Is it backed by full faith and credit of the government?

    • Who is the investor base?

      • Registration and oversight more important for retail investors and when material information is similar to that as would be required for equity offers

Issues to consider3
Issues to Consider

  • May not be necessary to have a registration scheme for offerings

    • Broker-dealer conduct regulation with strong market integrity provisions may substitute

    • Can impose disclosure obligations on intermediaries instead of issuers

      • Rule 15c2-12, as example

Issues to consider4
Issues to Consider

  • What information should be disclosed?

    • Material information, both financial and non-financial

      • Importance of high quality accounting and auditing principles/ standards (also to the rating agencies)

      • Importance of non-financial statement disclosure

        • MD & A: picture of company through management’s eyes

    • Role of market participants in demanding better and more timely information

Issues to consider5
Issues to Consider

  • Is enforcement regime effective?

    • Importance of strong, well-resourced, independent, regulator

      • Complemented by individual private right of action

    • Need effective judicial system with an impartial judiciary that will enforce regulatory action, where needed


  • Regulatory goal: Increase investor confidence and provide readily accessible source of capital

    • Comprehensive regulatory scheme not necessary

    • Key elements of regulation critical, but may vary depending on the legal structure, the market and the investor base

      • Oversight of intermediaries, including capital adequacy

      • Mandatory centralized disclosure and price transparency for investors

      • Prohibition of fraud and effective enforcement

  • Market development and regulation is evolutionary process