Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income

The New Compliance Landscape

Away from tax issues, recent developments on the legislative front also bear watching as they may eventually have a far-reaching impact on the tax-exempt market as a whole. In the aftermath of the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act (affectionately known as Dodd-Frank) was signed into law by President Obama on July 21, 2010 (some of its key features as of this writing are summarized in the Appendix). Ostensibly, Dodd-Frank aims to promote greater transparency in the municipal bond market and to establish a fiduciary standard for so-called “investment advisors” to municipal issuers, although the practical implementation of these lofty goals remain a moving target at this time. It also ushers in a new era of regulation in the tax-exempt sector. For the first time since the 1930s, the SEC is poised to exert a major regulatory role in the municipal market. Even the Municipal Securities Rulemaking Board (MSRB), until now charged only with protecting individual investors, will have responsibility for protecting the issuers as well.

For the high yield investor, the new regulatory environment holds some interesting promises. Poor and inconsistent disclosure has always been the bane of this market. Thus, the push for improved disclosure practices to match corporate-sector standards can only be beneficial. As disclosure practices become more standardized, investors can concentrate more on assessing economic risk, ...