MSRB Provides Municipal Market Guidance On U.S. Sovereign Credit Downgrade

Date: August 8, 2011

Contact: Jennifer A. Galloway, Chief Communications Officer
             (703) 797-6600


Alexandria, VA – The Municipal Securities Rulemaking Board (MSRB) today provided guidance to municipal market participants in light of recent events related to the sovereign credit rating of the United States government.

On August 5, 2011, Standard & Poor’s reduced the sovereign debt rating of the U.S. from “AAA” to “AA+.” On August 2, 2011, Moody’s Investors Service confirmed its U.S. government bond rating at “Aaa,” although Moody’s assigned the rating a “negative outlook.” Fitch Ratings announced that it has maintained its “AAA” U.S. sovereign credit rating on August 2, 2011, but said that it continued to review the credit and expected that the review would be complete by the end of the month. In downgrading the U.S. credit rating, S&P also announced that it would issue on August 8, 2011 a separate release concerning affected ratings in the public finance sector.

Municipal issuers with large numbers of federal employees in their jurisdiction or that rely significantly on federal government funding might be affected. S&P has noted that pre-refunded municipal bonds may also be affected as moneys held in escrow to pay the principal and interest of such bonds typically are invested in Treasury securities.

Although to date the MSRB has observed no unusual municipal market activity, as a result of this continuing uncertainty concerning the ratings of such states and local governments the MSRB is publishing guidance related to the application of MSRB investor protection rules. The MSRB, which regulates municipal securities transactions and operates the EMMA disclosure website, said that despite any market disruption that may result from rating actions, all MSRB rules continue to apply, including rules on fair practice, trade pricing, suitability and disclosure. The MSRB is particularly concerned about the treatment of retail investors. Any dealer that uses a financial market disruption to manipulate the pricing of municipal securities will be violating federal law.

“Dealers cannot ever take advantage of investors and should be extra vigilant, especially during times of market disruption,” said MSRB Executive Director Lynnette Kelly Hotchkiss. “The prices of municipal securities transactions must be fair and reasonable, and dealers cannot trade at off-market prices.”

The MSRB said that dealers that appear to be attempting to take advantage of any market disruption by trading in municipal securities at prices that are not fair and reasonable would be referred to the appropriate enforcement agency.

The existence of market disruption also does not negate a dealer’s duty to ensure that their recommendations are consistent with their obligations to make suitable recommendations. Dealers also must disclose all material facts concerning a transaction known to the dealer or available from established industry sources at or prior to the time of sale.

Hotchkiss also reminded investors that EMMA is a resource to bondholders on trade pricing and other important information about their municipal securities. “Investors have real-time access to municipal bond trade prices published by the MSRB through EMMA, and all disclosures made by issuers through EMMA are made publicly available immediately.”

Most issuers are under contractual requirements to submit material event notices to EMMA if their credit ratings change. Investors can sign up to receive email alerts from EMMA when any new disclosures are made on a security.

Municipal securities investors should check with the rating agencies to get the most current information about ratings changes for individual bonds.

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a self-regulatory organization governed by a 21-member board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is overseen by the Securities and Exchange Commission and Congress.