Cox: SEC to Propose New Disclosure Rules

WASHINGTON - The Securities and Exchange Commission plans to propose as early as the end of the month rules that would enhance municipal disclosure, SEC chairman Christopher Cox said in an interview Friday.

The proposals will be aimed at implementing some of the municipal securities initiatives outlined in a 2007 white paper that can be accomplished without congressional authorization, Cox said. They would also come on top of rule changes the commission proposed in July to establish a central disclosure repository called Electronic Municipal Market Access, or EMMA, that will be run by the Municipal Securities Rulemaking Board.

Cox declined to outline the specific proposals, saying he is still working on them with the commissioners and staff.

"The theme of our proposals has been amply laid out in speeches and testimony the past few years," Cox said, speaking in his expansive 10th floor SEC office overlooking the U.S. Capitol. "We will of course be limited to those things that we can accomplish with our existing regulatory authority."

Cox has sought to boost municipal accounting and disclosure through a direct but limited regulatory regime that would make municipal disclosure more like corporate disclosure and require issuers to adhere to generally accepted accounting standards as established by the Governmental Accounting Standards Board, among other things.

But the main impediment to direct SEC regulation on issuers is the 1975 Tower Amendment, which restricts the commission as well as the MSRB from directly or indirectly requiring muni issuers to file documents with them before their securities are sold.

Congress added the amendment - which was sponsored by the late Sen. John Tower, a Texas Republican - to the Securities Exchange Act of 1934, and as a result, the commission places disclosure requirements and burdens on the underwriters of municipal bonds, rather than issuers.

Still, market participants said yesterday that the SEC has a number of options for enhancing issuer disclosure indirectly, by broadly interpreting its anti-fraud authority tied to the sale municipal securities.

"Without congressional action, it is really hard for them to increase federal oversight over issuers of municipal bonds," said one lawyer who did not want to be identified. "But having said that, there are a number of rulemaking initiatives they can take, under the antifraud provisions, to pin issuers down and say, 'As a means to prevent fraud in the offering and sale of municipal bonds, issuers will do the following.' "

Another attorney who also requested anonymity speculated the commission might boost the frequency of municipal disclosure by amending the section of its Rule 15c2-12 that prohibits a broker-dealer from underwriting a muni transaction unless the issuer has agreed to disclose annual financial and operating information. Specifically, the SEC could amend the rule to require not just annual, but quarterly disclosures.

Meanwhile, Cox said Friday that the turmoil in the municipal market during the past year, in particular the auction-rate securities scandals and the possibility that Jefferson County, Ala., might have to file for bankruptcy, has only served to increase the urgency of his initiatives. He predicted that lawmakers will support them, while tacitly acknowledging that they had been slow to do so up until now.

"A great deal has happened in the markets in the past year," he said. "If any more evidence were needed that this affects markets in a serious way and touches millions of real investors, events have certainly provided them."

When Cox unveiled the initiatives last summer in a speech and subsequent white paper that he sent to Congress, they were received with only tepid support from market participants. Issuers roundly rejected them as unduly burdensome while Democratic lawmakers, including House Financial Services Committee chairman Rep. Barney Frank, D-Mass., said they were unneeded.

Cox is set to testify on the initiatives before Frank's committee on Sept. 23 at a hearing being held primarily at the request of Rep. Spencer Bachus, the committee's ranking Republican, whose district includes Jefferson County. Cox said Friday that he has spoken with Alabama Gov. Bob Riley, and "is trying to assist in assuring they [the county] have the best financial advisers."

Cox said that Jefferson County's problems illustrate two "nearly endemic problems" in municipal finance: "It is simultaneously the case that unsuitable investments might be pushed on to municipal issuers and that municipal issuers have failed to place responsibility for multibillion-dollar financings in the hands of professionally expert, technically competent people."

But, he added, the Tower Amendment "stands athwart" of the SEC's efforts to address a range of issues because the commission's direct authority extends only to broker-dealers. The SEC can only "pick up the pieces when it's too late for investors," Cox said. "Change is desperately needed there."

He said the Tower Amendment may only need to be altered, not fully repealed, to better equip the SEC.

"The spirit behind Tower needn't be entirely abandoned in order for some common sense to prevail," Cox said. "It simply makes no sense to attempt to provide much needed investor protection at the issuer level through a Rube Goldberg mechanism that places the burden exclusively onto broker-dealers. Right now it requires that issuer regulation, to the extent that it exists at all, be conducted through an elaborate charade."

Cox stressed that he is only advocating a limited regulatory regime because municipal issuers, unlike corporate issuers, are considered sovereign entities apart from the federal government.

Turning to EMMA, Cox said that once the portal is fully operational sometime this winter, it will constitute "one of the great advancements" as a successor to the four nationally recognized municipal securities information repositories that will provide the SEC with "a centralized look at [issuer] compliance" with secondary market disclosure agreements.

"It will permit us to focus our attention on the exceptions, on those who are non-compliant," he said, cautioning that overall compliance is likely very high, at least as measured by the dollar volume of outstanding bonds.

"But there are many small issuers who may be non-compliant that don't have overall an enormous impact on the market, yet pose a risk to investors," he said.

Cox said the commission remains "relentlessly focused" on its investigation of anticompetitive activities in municipal bond-related guaranteed investment contracts and derivatives that it is conducting in parallel with the antitrust division of the Department of Justice, the Internal Revenue Service, and 22 state attorneys general.

Reading from a prepared statement, Cox confirmed published reports that have noted that at least seven Wall Street and other firms - including J.P. Morgan Chase & Co., Bank of America, UBS AG, Wachovia Bank NA, the former Bear, Stearns & Co., Financial Security Assurance Holdings Ltd., and GE Funding Capital Market Services, Inc. - have publicly announced the receipt of Wells notices from the SEC enforcement staff. Among other things, they say the staff is considering recommending that the commission bring a civil injunctive action or institute administrative proceedings against them.

"Those same Wells notices state that the actions would allege that in connection with the bidding of various financial instruments associated with municipal securities, they violated the antifraud laws and rules," he said, again referring to published reports.

Meanwhile, Cox said the GIC and derivatives probe is just one that is being conducted out of the SEC's Philadelphia offices and is part of a comprehensive focus on municipal securities enforcement. As part of the muni enforcement push, he noted that the staff of the enforcement division formed a municipal securities working group last year that is being led by SEC officials in the Philadelphia office.

"It is also because of the devotion of significant new enforcement resources in the muni area that the enforcement division as a share of the total workforce at the SEC is now significantly larger than when I became chairman, and larger still than it was in the 1990s," Cox said.

As of last month, the commission had 1,175 full-time employees working in its enforcement division and another 39 additional full-time slots that are authorized but not yet filled, which compares to about 852 full-time enforcement employees in 1998, according to statistics provided by the SEC. During the 1990s, enforcement represented about 29% of the total SEC staff, compared to 32% when Cox became chairman in 2005 and about 34% as of last month.

Asked about the perception in the markets that the SEC has trailed the states on enforcement of auction-rate securities abuses, Cox said: "The division of enforcement designed the entire approach that was adopted for getting money back to investors."

Prompted by the chairman, an SEC spokesman said that the commission proposed to the states that firms be required to buy back ARS from retail investors so that they would be made whole.

Asked about the limited amount of time he may have as SEC chairman, given the upcoming election, Cox said that his term expires in June 2009 and that his term does not end with the Bush administration. Noting that former SEC chairman David Ruder served until the September following a presidential election, Cox said, "Chairman Ruder has ... urged me to stay for as long as possible and ideally until a successor is appointed and confirmed."

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