The municipal securities market has become increasingly complex over the past four decades. The market is over fifteen times larger today than it was in 1975, with an estimated $3.7 trillion of principal outstanding and around forty-four thousand distinct state and local issuers accessing the market to raise capital. Regulators have cautioned that “[t]he opacity of this market is unrivaled,” and they have expressed “deep[ ] concern[ ] that the perfect municipal storm may be brewing.” Exacerbating such fears is the increasing participation of individual or “retail” investors in the primary and secondary markets: through the 1970s, the majority of municipal bond purchasers were sophisticated investors, banks, and insurance companies; today, individual investors hold more than 75 percent of outstanding municipal securities. Arthur Levitt Jr, former chairman of the Securities and Exchange Commission (SEC), has urged reform in the municipal securities market precisely because individual, presumably less sophisticated investors “need the SEC’s full protection.” This heightened attention has culminated in a robust new regime of enforcement against municipal issuers who appear to have fraudulently misrepresented crucial aspects of their financial health to investors. Enforcement activity over the past six years has resulted in several notable SEC firsts: for the first time ever, the SEC has charged state governments with violating the antifraud provisions of the federal securities laws, secured monetary fines against local government officials and municipalities despite the traditional notion that government entities are immune from such penalties, and subjected official and legislative communications between local governments and their citizens to liability for fraudulent misrepresentation.
This Comment serves two purposes. First, it presents a narrative of the SEC’s recent enforcement activity in the municipal securities market, which recent scholarship has not yet provided. Second, it serves as a starting point for a much-needed critical analysis of the SEC’s newly invasive role in public finance.