Popular Muni Bonds May Face New Rules

THANKS to the combination of low interest rates, rising taxes for individuals with high incomes, and a lack of high-yield alternative investments, the municipal bond market continues to set new records.

The current demand for municipal bonds is set against a backdrop of mounting demands for tighter federal regulatory control over the market. Scandals involving political contributions to officials in charge of municipal bond underwriting programs in New York, Massachusetts, and New Jersey have been widely publicized.

On Sept. 9, a United States House of Representatives subcommittee began a formal inquiry into the municipal bond market. Officials with the three regulatory groups involved in overseeing the market - the Securities and Exchange Commission, the Municipal Securities Rulemaking Board, and the National Association of Securities Dealers - raised concerns about potential conflicts of interest within the market and a lack of financial information provided to investors.

Rep. Edward Markey (D) of Massachusetts, chairman of the House Telecommunications and Finance subcommittee, plans to hold an additional round of hearings in early October. Legislation to tighten regulation over the market might be introduced later this year, a spokesman says.

About three-quarters of the nation's $1.1 trillion in municipal bonds are currently held by individual investors.

New municipal bonds with a value of more than $66 billion have been sold this year through Sept. 20, according to Securities Data Company. That is less than the $78 billion sold in the same period in 1992. The major activity in 1993 has come in refinancing existing bonds - $138 billion in bonds through Sept. 20, up from $84 billion for the same period in 1992.

Mutual funds that invest in municipal bonds have also set records:

* Through July 1993, total sales of national bond funds, which are portfolios of municipal bonds from diverse political jurisdictions, reached $22 billion, compared with sales of about $15 billion for the same period in 1992, according to the Investment Company Institute (ICI) in Washington. Sales of single-state municipal bond funds reached $18 billion, up from $12 billion.

* Total assets of national bond funds reached $130 billion compared with assets of $104 billion. Assets of single-state bond funds reached $104 billion compared with assets of $79 billion.

``The current interest in municipal bonds goes back to at least the election year of 1990,'' the ICI's John Collins says, ``reflecting both the steady decline in interest rates, which caused the value of existing bonds to appreciate, as well as a perception that taxes would go up.''

Municipal bonds generally pay higher interest rates than US government bonds. Interest earnings are usually exempt from federal and some state and local taxes.

Bond experts say new regulations will most likely include a requirement for greater financial disclosure from public agencies that sell the bonds, establishment of a central clearing house to identify price markups by bond dealers, and disclosure of campaign contributions to officials managing bond offerings.

Market observers expect state and local officials to fight hard against tougher regulations.