Securities and Exchange Commissioner Annette Nazareth, who leaves the SEC today, contends state and local governments should comply with the generally accepted accounting principles issued by the Governmental Accounting Standards Board, warning that a failure to do so could lead to future accounting debacles.
In an interview Monday, Nazareth, the commission’s lone Democrat since September, expressed strong support for the municipal market initiatives SEC chairman Christopher Cox unveiled last summer, which include a call for Congress to require all issuers conform to GASB standards. The SEC estimates that nearly 20,000 of the roughly 50,000 muni issuers do not.
“How can it be that in 2008 there’s not even a national requirement to follow generally accepting accounting standards?” she asked, noting that the pension crisis in San Diego earlier this decade could be repeated elsewhere. “How can we be so stuck that even something as simple as a common language in which to disclose financial information has not been uniformly adopted?”
Nazareth said it is incumbent on the SEC to continue to push for improved disclosure and accounting standards in the municipal market, even if its efforts are not met with widespread support in Congress. It is difficult to shepherd proposals through Congress, especially in an election year, but that should not stop the SEC from identifying problems in the market, she added.
“There must be things that seem like low-hanging fruit that really could potentially come to bite us later,” Nazareth said. “So how can we have not at least put on record that something as fundamental as a common accounting standard has not been mandated?”
“Chairman Cox basically said, ‘If you really want to improve the current state of things, these are the things you would focus on,’ ” she continued. “These are the things that should get done.” She added that whether or not they can get done is another issue.
In addition to mandating GASB accounting standards for issuers, Cox asked Congress to provide an independent source of funding for, and SEC oversight of, GASB. He also asked Congress to clarify the legal responsibilities of municipal transaction participants and to require corporate borrowers in the muni market to meet the same registration and disclosure standards they would be subject to if they were not borrowing through a state and local government conduit issuer.
One of the initiatives pushed strongly by Cox is the creation of a free, centralized Edgar-type system for the municipal market, which Nazareth said she strongly supports. Though the other initiatives would require congressional approval, the SEC announced last month that it plans to draft changes to its Rule 15c2-12 on disclosure to require issuers to use of the muni-Edgar, which is to be developed and hosted by the Municipal Securities Rulemaking Board and called Emma.
A single disclosure site, Nazareth said, will greatly improve upon a flawed “patch-work quilt” of existing information provided by the four nationally recognized municipal information repositories or NRMSIRs. She suggested that the NRMSIRs charge too much for information and sometimes misfile documents, an apparent reference to complaints by market participants.
EMMA also might lower bond prices the way studies show the Financial Industry Regulatory Authority’s Trade Reporting and Compliance Engine, or TRACE system, decreased prices for corporate bond issues, Nazareth said.
“I think that EMMA holds great promise for the municipal market and will make a difference just like real-time reporting did,” she said, referring to the MSRB’s real-time transaction reporting system, which has been in place since early 2005 and requires dealers to submit pricing and other information from most trades within 15 minutes of execution. “Although sometimes these things appear to be incremental, they really do make a big difference.”
While Nazareth generally is supportive of Cox’s muni initiatives, she cautioned that the commission should be wary of crafting major changes to its Rule 15c2-12 on disclosure that would add to the indirect regulatory burdens already placed on the broker-dealer community for municipal issuer disclosure. Significant changes to the rule should come through legislative action, since the SEC has limited direct statutory authority over municipal securities, she said.
Under the existing rule, which has not been updated since 1994, a dealer may not underwrite munis unless the issuer of the bonds has contractually agreed to disclose financial and operating information at least annually, and to disclose the occurrence of any of 11 types of “material” events, such as adverse opinions affecting the tax-exempt status of the bonds, and principal and interest payment delinquencies. The SEC staff has said it may revisit the rule later in the year, after altering it to allow for the establishment of the Emma system.
Prior to becoming a commissioner in 2005, Nazareth served as the SEC’s director of market regulation. She was in that position when the office of municipal securities transitioned from an independent office that reported directly to the chairman to one that fell within the purview of the market regulation division.
She joined the commission in September 1998, when then-chairman Arthur Levitt recruited her from Salomon Smith Barney, now Citi, to be his senior counsel, for which she was responsible for municipal securities and other issues. She was later appointed director of the division of market regulation in March 1999.
Nazareth’s municipal experience predates her work at the SEC. While at Salomon, she worked as a managing director and deputy head of the capital markets’ legal group and dealt with issues involving municipal and other securities and derivatives. From 1994 to 1997, she was senior vice president at Lehman Brothers, where she headed the legal and compliance department’s fixed-income trading group.
Nazareth, who is married to Roger Ferguson, the chairman of Swiss Re American Holding Corp. and former vice chairman of the Federal Reserve Board, said she plans to take a few months off before seeking a job in the private sector in the Washington-area. Ethics rules restrict her ability to look for a new job until after she leaves the commission.
Democrat leaders in the Senate have proposed two nominees to fill the vacancies on the commission left by Nazareth and Roel Campos, another Democrat who joined the Washington office of the law firm Cooley Godward Kronish LLP in the fall, according to sources.
One of the two, Elisse B. Walter, the senior executive vice president of the regulatory arm of FINRA, has extensive knowledge of the municipal market, is a former SEC official, and had a hand in writing the SEC’s 1994 interpretive release to its changes to Rule 15c2-12 that year. The second candidate, Luis A. Aguilar, is a partner who specializes in corporate and business law at McKenna Long & Aldridge LLP in Atlanta.
Senate Majority Leader Harry Reid, D-Nev., reportedly recommended that President Bush consider nominating Walter and Aguilar in the fall, but their lengthy background checks are still ongoing, according to sources.
The White House has been generous in allowing Senate Democrats — who along with other Senate members must confirm any formal nominees — to recommend candidates. The two are expected to be Democrats because no more than three of the SEC’s members can be from the same party and the three remaining members are Republicans.
