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Discord on Disclosure

WASHINGTON - Market participants made passionate, if opposite, arguments last week in response to Securities and Exchange Commission chairman Christopher Cox's remarks that he will renew his push to urge Congress to boost municipal disclosure and accounting standards, with issuers taking a strong stand against Cox and analysts supporting him.

State officials warned that such enhancements are not needed and dismissed the idea that any of the ongoing market problems, including the possible bankruptcy in Jefferson County, Ala., warrant wholesale changes to the existing municipal disclosure regime.

"Jefferson County is a relatively isolated incident relative to the overall municipal market and all of the disclosure in the world I don't think helps financial mismanagement," said Ben Watkins, the director of Florida's division of bond finance and a member of the Government Finance Officers Association's committee on governmental debt management. "I would think that the SEC ought to have other priorities in terms of where they ought to spend their time, effort and energy protecting investors."

Watkins added that disclosures problems tied to the auction-rate securities market, which collapsed in February, lie solely with the broker-dealer community that controlled the auctions and failed to disclose the extent to which the market was dependent on their support. "That doesn't have anything to do with issuer disclosure," he said.

Frank Hoadley, Wisconsin's capital finance director and chair of the GFOA debt committee, said that the ARS problems are largely attributable to investors not reading their offering documents, rather than to problems with issuer disclosures. "There's an old saying in the municipal bond market that buyers don't read and readers don't buy," he said. "They didn't bother to read the disclosure documents, and I'm not aware of any that didn't spell out the risks."

But buy-side analysts argued that municipal disclosure problems are widespread and serious - highlighting in particular the staleness of annual filings - and urged other market participants to consider reasonable changes to the existing regulatory framework.

"We have the weakest set of rules in the entire capital markets," said Tom Weyl, director of research at Eaton Vance Management in Boston, and a member and former past chairman of the National Federation of Municipal Analysts. "While GFOA and others may argue against the need for enhanced disclosure, there are a lot of transactions that are not issued by their membership [but rather] other parts of the market that are extremely risky and that absolutely need more disclosure. It's actually embarrassing that we even have to fight for this in this sophisticated an economy."

The remarks from issuer officials and analysts come days after Cox said in an interview with The Bond Buyer that the commission plans to propose as early as the end of the month rules that would enhance municipal disclosure, in an attempt to implement some of the municipal securities initiatives outlined in a white paper he wrote last year that can be accomplished without congressional authorization.

The rules would come on top of an existing SEC proposal to replace the four nationally recognized municipal securities information repositories, or NRMSIRs, with a free, central repository known as Electronic Municipal Market Access, or EMMA, run by the Municipal Securities Rulemaking Board.

Cox, who plans to discuss his white paper at a hearing before the House Financial Services Committee Sept. 23, also said that he may ask Congress to consider amending the Tower Amendment, which lawmakers crafted in 1975 to restrict the SEC and the Municipal Securities Rulemaking Board from directly or indirectly requiring muni issuers to file documents with them before their securities are sold.

"Change is desperately needed there," Cox said, referring to Tower, which he said should be amended - rather than repealed - to allow for a limited disclosure regime that respects the sovereignty of governmental issuers. Because of Tower, the SEC places disclosure requirements and burdens on the underwriters of municipal bonds, rather than issuers, in what Cox called a "Rube Goldberg mechanism" and "an elaborate charade."

But Hoadley said there is no need to alter Tower because municipal disclosure is already adequate. "The Tower amendment is simply a reflection of the sovereignty rights of the state and governments," he said. "Anyone who wants to tamper with that is in for a fight and is going to have to present a really good case.

In contrast, Weyl argued that a review of the Tower amendment should be seen as imperative in light of its age. Since its implementation, he noted, the market has grown exponentially and the types of securities have become more sophisticated, while the regulatory system has remained largely the same.

"The municipal market is now one-third individual investors and one-third proxies for individual investors," he said. "You can't tell me that market doesn't cry out for more disclosure and that there's more need for people to see what they actually own."

The NFMA got a boost Friday when Edgar Online, a vendor of secondary market disclosures, endorsed the establishment of EMMA. In a comment letter to the SEC, the firm warned about widespread failure of issuers to comply with 15c2-12 requirement that they disclose annual financial statements and operating information and also said it had found a lack of fundamental data and analysis in the municipal market, which "represents one of the most significant risks to investors."

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