The municipal securities market comprises both primary and secondary markets. In the primary market, underwriters buy new securities from municipal issuers (e.g., local government entities) and subsequently sell them to investors during the primary offering.trade after the primary offering are said to trade in the secondary market, Municipal securities that with both institutions and individuals participating. Institutional investors typically trade municipal securities in amounts of $1 million or more and generally are in the market full-time to provide or preserve income as well as maximize investment returns for their clients or firms. In contrast, individual investors typically trade municipal securities in amounts of $100,000 or less and access the market relatively infrequently, with the intent to buy and hold securities until maturity. Many individual investors find municipal securities an attractive investment option because of the tax advantages these intruments offer. Unlike the dividends on equity securities (which also trade in a market with considerable individual investor participation), the interest on most municipal securities is exempt from federal income tax and, in some cases, from state or local income tax. In addition, as debt instruments municipal securities are generally considered less risky than equity securities. For example, issuers of debt securities have a contractual obligation to return the principal value of the security to the holder at maturity, while issuers of equity securities do not. Further, issuers of debt securities also have a contractual obligation to pay investors a fixed or variable rate of interest income. On the other hand, dividend payments to shareholders of equity securities are decided by the company’s board of directors. Data on the number of municipal issuers and outstanding municipal securities are not officially tracked by regulators or the private sector. Third-party information vendors provide a range of estimates; data we obtained from one indicated the municipal securities market has over 46,000 municipal issuers, including states, counties, cities, towns, and state and local government agencies, among others, and at least 1.1 million securities outstanding. In contrast, about 5,700 public companies list their equity securities for trading on the major U.S. exchanges. Each municipal issuance is unique, with its own credit structure, terms, and conditions. Most outstanding municipal securities trade infrequently—for example, in 2010 about 99 percent of outstanding municipal securities did not trade on any given day. The heaviest trading of municipal securities typically occurs immediately following their issuance, after which trading becomes sporadic. The municipal securities market is geographically fragmented, with secondary market trading supported by national and regional broker- dealer firms that serve institutional investors (institutional broker-dealers) or individual investors (retail broker-dealers), and in some firms, both. Several national broker-dealer firms have enough capital and geographic presence to underwrite large new issuances nationwide, trade in large volume with institutional investors, and offer expertise in virtually every sector of the market. Some midsized broker-dealer firms also have nationwide coverage for institutional and individual investors on a smaller scale. But other broker-dealer firms provide inventory and expertise in well-defined geographic areas, allowing them to serve individual investors—many of whom invest in municipal securities to enjoy state or local income tax benefits—as well as institutional investors who need access to local markets. Given the heterogeneity and variety of municipal securities available, the fact that they are traded infrequently, and the geographic fragmentation of the market, broker-dealers typically work with their customers to find available securities that fit preferred parameters (e.g., geographic location, yield, credit quality, or price) instead of specific securities. Most broker-dealers execute trades as the principal by trading securities from their proprietary accounts. other features that allow users to share information on and post offerings, obtain and provide bids on securities, and conduct research and analysis. Broker-dealers may also use broker’s brokers and electronic trading platforms to trade in the secondary market. Currently, about 20 broker’s brokers promote additional liquidity and facilitate information flow in the municipal securities markets by specializing in segments of the market (by region, issuer, or type of security) and helping broker-dealers find buyers for their securities in their areas of expertise. They do so primarily by arranging auctions called bid wanted procedures (bids wanted) for broker- dealers that are selling securities, particularly in unfamiliar areas of the market. Broker-dealers can also buy and sell municipal securities for their customers through electronic trading platforms that combine inventories from market participants, typically broker-dealers, into one location, thus enabling users—mostly broker-dealers and, in some cases, institutional investors—to search for, buy, and sell municipal securities from a single site. Some of these trading platforms focus on trading for the individual investor market. However, individual investors typically do not have direct access to these trading platforms, although they may have indirect access through a retail broker-dealer. About 1,800 securities firms and banks are registered with MSRB as broker-dealers of municipal securities. As an SRO, MSRB develops rules for broker-dealers engaged in underwriting, trading, and selling municipal securities with the goals of protecting investors and issuers and promoting a fair and efficient marketplace. To further its mandate to protect investors, MSRB also operates information systems designed to promote post-trade price transparency and access to municipal securities issuers’ disclosure documents. MSRB provides this access free of charge through its Electronic Municipal Markets Access (EMMA) website. As we have seen, FINRA and federal banking regulators enforce MSRB rules for broker-dealers under their respective jurisdictions. FINRA oversees 98 percent of those MSRB-registered broker-dealers that are also registered members of FINRA, while federal baking regulators oversee the remaining 2 percent. SEC has designated FINRA as the entity responsible for conducting surveillance of trade data from RTRS for potential violations of MSRB rules. FINRA employs automated surveillance in its compliance monitoring that is programmed to review RTRS data for potentially excessive prices and late trading, among other rule violations. FINRA staff review alerts generated by automated surveillance systems to identify those that warrant further investigation. When FINRA finds evidence of potential violations of these rules involving those broker- dealers who are its members, it can take action ranging from informal warnings to the imposition of monetary fines to expulsion from its membership, among other sanctions. FINRA refers potential violations involving bank dealers to the appropriate federal banking regulator. During the period of our review, FINRA and the federal banking regulators conducted routine examinations of the firms under their jurisdiction once every 2 years for compliance with MSRB rules, pursuant to MSRB requirements. OCIE administers SEC’s nationwide examination and inspection program. OCIE oversees the SROs’ compliance with federal securities laws and the SROs’ enforcement of their members’ compliance with federal securities laws and SRO rules through inspections. Inspection review areas include an SRO’s compliance, examination, and enforcement programs. OCIE also directly assesses broker-dealer compliance with federal securities laws through examinations such as cause and risk- based examinations. If examiners identify compliance findings during broker-dealer examinations, they may assess the quality of any recent FINRA examinations of the broker-dealer and provide oversight comments to FINRA. SEC’s Office of Municipal Securities is a separate office within the Division of Trading and Markets that coordinates SEC’s municipal securities activities, advises on policy matters relating to the municipal security market, and provides technical assistance in the development and implementation of major SEC initiatives in the municipal securities area. In addition, the Office of Municipal Securities reviews and processes rule proposals filed by MSRB and acts as SEC’s liaison with MSRB, FINRA, and a variety of industry groups on municipal securities issues. SEC’s Division of Enforcement (Enforcement) investigates possible violations of securities laws, recommends commission action when appropriate, either in a federal court or before an administrative law judge, and negotiates settlements. In January 2010, Enforcement created the Municipal Securities and Public Pensions Unit, which focuses on misconduct in the municipal securities market and in connection with public pension funds. Because of the heterogeneity of the issuers and the securities they issue, the large number of securities outstanding, and the infrequency with which these securities trade, the municipal securities market does not maintain reliable tradable quotes on all outstanding municipal securities.Consequently, broker-dealers we spoke with said they use a variety of information to determine the prices at which they are willing to buy and sell securities. We found that institutional investors traded at more favorable prices than individual investors and were generally better equipped to make independent assessments of the value of a security. SEC, MSRB, and market participants have been considering ways to improve pretrade price transparency. As we have seen, the large municipal securities market, with its many issuers and infrequent trades for a given security, does not have readily available, transparent information on the prices of securities. Municipal broker-dealers generally determine the prices at which they are willing to trade by making relative assessments of a security’s market value, drawing on various sources of information and incorporating their compensation for facilitating the trades.identified as relevant to their pricing determinations included (1) recent post-trade price information on same or comparable securities, (2) available pretrade price information on the security or comparable securities, (3) the characteristics and credit quality of the security, (4) relevant market information, and (5) the cost of trading the security. Several factors that broker-dealers we spoke with First, when determining prices, broker-dealers said they often began by reviewing recent post-trade information on the same or similar securities. In 2005 MSRB began requiring broker-dealers to report price data on most municipal securities transactions within 15 minutes to RTRS and, in 2008, made this post-trade pricing information freely available on the EMMA website.