PHILADELPHIA — The Securities and Exchange Commission cannot set up a corporate-style disclosure regime for the municipal market under its rules because it does not have the statutory authority to do so, the SEC’s muni chief told financial advisers here yesterday.
Speaking to the National Association of Independent Public Finance Advisors annual conference, Martha Mahan Haines, chief of the SEC’s Office of Municipal Securities, said she has received “many suggestions” from market participants that the SEC simply use its Rule 15c2-12 on disclosure to “indirectly establish essentially a corporate regime for municipal issuers.” The rule sets up a municipal securities disclosure regime through municipal broker-dealers.
But, she said, the SEC does not believe such an idea is appropriate for a corporate-style disclosure system, comparing it to trying to drive a semi through the back of a building.
“We don’t have direct authority to establish that kind of regime, [so] we shouldn’t be trying to do it through the back door,” she said. “We can nibble a little here where there’s some important issues for broker-dealers to know to make sales … but trying to just completely drive a truck indirectly through this is just not a good idea.”
Haines said she and SEC chairman Mary Schapiro hope that Congress will act to give the commission more authority in this area, but did not offer any specifics on the types of changes the SEC is seeking. Instead, she repeated similar remarks Schapiro made last month in a speech in Washington, about the need to work with Congress to boost its authority in this area.
Earlier this year, SEC staff and commissioner Luis Aguilar said they would like Congress to repeal the so-called Tower Amendment in the Securities Exchange Act of 1934, which restricts the SEC and the Municipal Securities Rulemaking Board from collecting disclosures prior to bond sales, and also remove additional exemptions for munis in the securities laws.
But some sources have speculated that the SEC staff are reluctant to publicly push for the repeal of Tower partly because it is such a politically contentious issue. Issuers remain adamantly opposed to any changes to amendment, which they believe are unnecessary.
Turning to the changes to 15c2-12 that the SEC proposed in July, Haines noted they would remove exemptions for variable-rate demand obligations from secondary, but not primary, market disclosure requirements. Broker-dealer and other muni market groups have questioned whether this would make sense.
Haines explained that removing the primary disclosure exemption would be unnecessary because most VRDOs are widely purchased by money market mutual funds that already demand primary market disclosure before they buy them.
She also said that removing the exemption could be overly burdensome, particularly if it meant that remarketings had to be treated as primary offerings and underwriters would be required to continuously review the disclosures in the remarketing documents. Some VRDOs reset on a weekly, or even daily, basis.
“You could just see an underwriter like a gerbil in a cage trying to review these documents and to keep certifying that they’ve reviewed them, over, over, and over,” she said. “It didn’t make sense, and that’s why we focused more on the continuing disclosure side.”
Haines said the SEC staff is still sifting through, and internally discussing, the voluminous comment letters it received on its proposed changes for 15c2-12. She did not say when the commission plans to vote on adopting the changes. Though the Washington Post reported this week that the changes are not expected to be adopted until next year, sources said the SEC staff hopes they are adopted by the end of the year.
Though the independent FAs said they are closely following the SEC’s regulatory proposals, they are especially focused on a bill introduced into the House in May by Rep. Steve Driehaus, D-Ohio, that would impose a fiduciary standard on all municipal FAs and require them to register with the SEC. Congressional sources have said that the stand-alone bill will likely be added to broader legislation tied to financial regulatory reform.
NAIPFA wrote a letter to lawmakers in March saying it is opposed to any attempts to regulate independent FAs, but added that it wants to work with lawmakers if they insist on pushing for such legislation.
NAIPFA president Steve Apfelbacher, who is president of Ehlers & Associates Inc. in Roseville, Minn., said that the group’s members will meet today to reevaluate its stance on the bill.
“Time’s gone by since we originally drafted that position and we wanted to evaluate it,” he said in a brief interview.
Asked about a separate legislative proposal — a draft bill unveiled last week that includes a provision to make the 15-member MSRB a majority public self-regulatory organization — Apfelbacher said he hopes that lawmakers will carve out space on the board for independent FAs.
“FAs comprise a good portion of the market,” he said, noting an MSRB study released in April that said 70% of issuers rely on FAs for advice. “So since they have a significant role in the market, there should be a position for them.”
Specifically, the study said that of the total $453 billion in par value of muni bonds that were sold in 2008, roughly 70% — or about $315 billion — came to market with the assistance of a financial adviser.
The report was released as the MSRB argued that it should be given the authority to regulate independent FAs and other market intermediaries — authority the SEC is also seeking.
