Financial Federalism and the Short, Happy Life of Municipal Securities Regulation

I. INTRODUCTION II. BACKGROUND A. A Scandalous, if Untitillating, History: Municipal Poster Children B. Who Does What and to Whom 1. The Regulation of Dealer Practices 2. The Backdoor to Disclosure a. Transaction Information b. Deal Information c. Issuer Information i. General ii. Accounting Issues III. FINANCIAL FEDERALISM IV. GRAND THEORIES A. Law and Economics B. Public Choice V. OTHER CONSIDERATIONS VI. SECOND-BEST OR PROTOTYPE? A. The Content of Disclosure 1. Learning from Past Mistakes 2. A New Laboratory B. The Pros and Cons of Full Regulation 1. Debt vs. Equity 2. Commission Review 3. Limitations on Oral and Written Offers and Prospectus Delivery Requirements C. Civil Liability VII. CONCLUSION I. INTRODUCTION Not to put anyone off, but field of municipal securities (1) regulation is antithesis of sexy. Its powerful soporific effect may already be making itself felt on reader; its effect on legal scholars is manifest. Academic attention to issues presented by municipal securities regulation is extremely limited and grand theories of municipal securities regulation are glaringly absent from pages of our country's law journals. (2) One purpose of this Article is to question why this is so, as well as to establish that it is something that might be of concern. Another is to observe that, from perspective of end user, functional differences between municipal and nonmunicipal securities regulation may and should be coming to an end. The third is to make case for using municipal securities regulation as a pilot program for overall improvement of federal securities laws. The market for municipal securities is large--to person on street perhaps eyepoppingly so. Even in 1975, first year in which federal government attempted regulation of that market, $25 to $49 billion of municipal securities were outstanding. (3) There are now more than $2.4 trillion outstanding; (4) lion's share is directly or indirectly owned by individual investors. (5) Nonetheless, according to Securities and Exchange Commission (SEC or Commission) as recently as 2006, the model of full registration, Commission review, and other regulation applicable to nonmunicipal issuers is not necessary or appropriate for state and local governments. (6) The explanation for this is recognition of fact that municipal issuers are themselves U.S. sovereigns. (7) In same speech in which SEC apparently was tugging its forelock in vague direction of federalism, however, it recognized deficiencies in currently applicable regime. (8) The Commission specifically called on Congress to improve municipal accounting and disclosure practices, evidently acknowledging that it has reached or is reaching limits of its own authority. (9) This is particularly interesting in light of a languishing rule proposal made by SEC relating to municipal point-of-sale disclosure, (10) and may have to do with jurisdictional lumps Commission has suffered in last few years at hands of D.C. Circuit Court of Appeals. (11) A supplemental explanation is that Commission foresaw some sort of train wreck coming, and wished to establish publicly that it would have done more if only it could. In any event, academy's disinclination to comment on regulation of municipal finance cannot be justified either by its lack of importance or by its state of perfection. More plausible reasons might include arguable obviousness of answers to at least a few of questions that might be raised, as well as resignation to notion that watchful industry lobbies might defeat any meaningful change. Another potential suspect is reluctance of at least some of academic bent to acknowledge a situation in which that free market thing--well, it just hasn't quite worked out way it should. …