WASHINGTON - The sweeping financial regulatory reform plan that the Obama administration unveiled yesterday calls for expanding the authority of the Securities and Exchange Commission to promote transparency in disclosures to investors, which some market participants said appears to be in line with the SEC's plans to bolster its oversight of municipal securities.
The release of the 85-page, five-part white paper - the broadest set of reforms for the financial services industry since the Great Depression - comes as SEC officials have said they may propose legislative and regulatory initiatives for the municipal market as early as next month.
The commission wants to obtain greater control of municipal disclosure and accounting standards, regulate market intermediaries, and alter the composition of the Municipal Securities Rulemaking Board to make it more representative of the entire muni market.
Currently, the SEC has no direct authority for regulating issuers and is restricted - along with the MSRB, which is dominated by dealers - from regulating issuer disclosures prior to bond sales.
Though the white paper barely mentions municipalities, it states: "To promote transparency, we propose revisions in the federal securities laws to enable the SEC to improve the timing and quality of disclosures to investors."
At least one market participant said it is hard to know if that line was meant to apply to munis, in part because it is in a larger section on mutual funds. But others warned the language in the white paper may be significant for the muni market.
"The bond market needs to be aware, because if you read between the lines there are places where the municipal market could be directly affected," said Scott DeFife, senior managing director for government affairs at the Securities Industry and Financial Markets Association.
For instance, DeFife noted that language in a related section of the white paper calls for giving the SEC greater authority over the market intermediaries, mirroring legislation introduced in the House Financial Services Committee that would allow the SEC to regulate currently unregulated muni financial advisers. DeFife said he expects that bill will be attached to the larger financial regulatory reform package as it evolves.
In formally announcing his administration's proposals yesterday, President Obama outlined a series of changes his administration would like Congress to consider, including that the Federal Reserve become a de facto systemic risk regulator, supervising all firms that pose a threat to financial stability, even those that do not own banks. He also called for establishing a Financial Services Oversight Council to identify emerging systemic risks and improve interagency coordination, though it's unclear if it would have much authority.
Obama said the financial crisis is due to a "failure of the entire system" and warned that without changes, another crisis could occur. "The events of the past few years offer ample testimony for the need to make significant changes," he said. "The absence of a working regulatory regime over many parts of the financial system - and over the system as a whole - led us to near catastrophe."
Speaking to reporters outside the White House following Obama's remarks, House Financial Services Committee chairman Barney Frank, D-Mass., and Senate Banking Committee chairman Christopher Dodd, D-Conn., said there is general agreement among Democratic lawmakers to create a systemic risk regulator. Though the Fed is expected to play an important role, the responsibility for other regulators in assessing systemic risk must still be worked out, they said.
"The issue of how you have an effective agent on systemic risk regulation but a structure that gives you assurance that it's done in a kind of collegial way, that's an issue that we'll be working on," Frank said.
Without fully endorsing a council of regulators, Dodd said there is widespread concern about whether the Fed, as the central bank responsible for setting monetary policy, "can assume that responsibility without bringing some bias to that discussion of what systemic risk is and how you enforce it."
"There's not a lot of confidence in the Fed at this point - and I'm stating the obvious - over what's happened over the last number of years," he added.
The administration's white paper is organized into five primary areas. The first pushes for stronger oversight of financial firms, in part by establishing a systemic risk regulator while boosting the capital requirements of all financial firms and imposing even higher standards for "large, interconnected" firms. It also calls for the creation of a Office of National Insurance within the Treasury to gather information, develop expertise, negotiate international agreements, and coordinate policy in the insurance sector.
The second part of the white paper calls for enhanced regulation of securitization markets, including new requirements for over-the-counter derivatives, registration of hedge fund advisers and stronger regulation of credit rating agencies.
In addition, the paper calls for boosting consumer protections for financial products like mortgages and credit cards through the establishment of a new Consumer Financial Protection Agency; giving the government additional tools to reduce the impact on the economy when large, interconnected firms fail; and the broad establishment of global regulatory standards.
Victoria "Penny" Rostow, the governmental affairs director for the National Association of Bond Lawyers, said Congress will likely use the Treasury white paper as a baseline and explore other regulatory proposals, some of which may be more closely tied to municipal securities. She added there is likely to be another wave of reforms when the Financial Crisis Inquiry Commission, established to investigate the meltdown, issues an interim and then a final report before the end of next year.
Some muni market participants applauded the fact that the white paper does not include major changes to the structure or jurisdiction of the SEC, or the self-regulatory organizations that operate under it such as the MSRB.
Michael Decker, co-chief executive officer of the Regional Bond Dealers Association, said that in general the muni market is "well-regulated" and "you could make a strong case why it's important for the municipal market to continue to have its own dedicated SRO."
However, Decker stressed that the RBDA has some concerns about boosting the capital requirements of all financial firms, including small- and medium-sized firms that are not systemically important and did not contribute to the financial crisis.
"I don't think you can really justify imposing a greater degree of regulation [on them] with respect to risk activity," he said. "How is raising their capital standards going to mitigate risk in the financial system?"
Among the other changes that may affect the muni market, if indirectly, the white paper also calls for the SEC to strengthen its regulatory framework for money market funds and take steps to prevent investor "runs" on the funds.
It recommends that the President's Working Group on Financial Markets prepare a report on whether more fundamental changes are needed, such as floating net-asset values and emergency liquidity facilities, to curtail systemic risks in the money market fund industry. Tax-free money market funds held $465.89 billion in total assets for the week ending June 8, according to the Money Fund Report, a service of iMoneyNet.com.
Meanwhile, the white paper also calls for the SEC to continue to strengthen its regulatory regime over the credit rating agencies and to make its rules consistent with international standards.