SEC Investor Advocate Endorses Municipal Bonds
Commentary by Steven Lofchie
SEC Investor Advocate Rick A. Fleming expressed concern about the current state of municipal bond ownership.
At the MSRB Municipal Securities Regulator Summit, Mr. Fleming asked how municipal bond ownership had "become a lifestyle of only the rich and famous, as opposed to an investment option for the middle and upper-middle classes." "Ironically," he suggested, "the answer appears to lie with the tax advantages of muni bonds," which in turn were exacerbated by "the shift from defined benefit pension plans to defined contribution retirement plans." Mr. Fleming observed that the "lower-yield for lower-tax tradeoff" for municipal bonds "tends to lose its appeal within the context of a tax-advantaged retirement account, where all holdings are tax-deferred."
Mr. Fleming argued:
"One outgrowth of this trend . . . is that muni bonds may no longer be attractive for the average investor. Today’s muni investors are likely to be those who are wealthy enough to have fully funded their retirement accounts and, unfortunately, recent data suggests this may be a relatively small proportion of the population."
Mr. Fleming urged regulators to approach the issue by asking "whether the tax benefits of municipal bonds, which were presumably intended (at least in part) to incentivize investment in munis, are actually accomplishing that objective." He asserted that "the past few years are evidence that regulators can take strides toward an innovative, flexible market while continuing to protect investors." As examples, he highlighted recent rulemakings concerning Electronic Municipal Market Access ("EMMA"), Trade Reporting and Compliance Engine ("TRACE"), and markup disclosure requirements.
Commentary
Despite being the SEC investor protection advocate, Mr. Fleming seems to be promoting legislation that would incentivize lending to municipalities instead of private enterprises. His argument requires some consideration. Are retail investors served by a campaign for measures that would incentivize lending to municipal entities?
Mr. Fleming's hypothesis is that lending to munis has been effectively discouraged by employers' migration from defined benefit pension plans to defined contribution pension plans. That premise seems a bit of a reach. It would seem more straightforward to say that the tax benefit given to various retirement savings plans, such as IRAs, effectively negates the tax benefit given to investing municipal bonds. That is, if an investor can save for retirement by purchasing private securities in a tax-advantaged retirement account, then that makes more sense than purchasing tax advantaged municipals, either in or out of the retirement account.