SEC Chief Eyes Regulation

WASHINGTON — Securities and Exchange Commission chairman Mary Schapiro yesterday told members of the Senate Banking Committee that the SEC is considering whether legislation is needed to fill gaps in regulatory oversight, including those related to municipal securities, credit default swaps and hedge funds. She said the commission will soon consider rulemaking tied to mutual funds.

She also told reporters that the SEC will seek oversight of unregulated market intermediaries such as financial and swap advisers — authority currently being sought by the Municipal Securities Rulemaking Board.

Meanwhile, MSRB chairman Ron Stack, managing director and head of public finance at Barclays Capital, asked the lawmakers to consider modifying the MSRB’s authority to include “an enforcement and examination support function that would further strengthen enforcement in the municipal securities market.” Currently the Financial Industry Regulatory Authority enforces MSRB rules.

Speaking at a hearing on enhancing investor protection and regulating the securities markets, Schapiro steadfastly defended the importance and independence of her agency, which she took over just two months ago.

“Congress created only one agency with the mandate to be the investors’ advocate,” she said. “If there were ever a time when investors need and deserve a strong voice and a forceful advocate in the federal government, that time is now.”

Turning to the need for legislation to improve the municipal market, she said: “It is time for those who buy municipal securities that are critical to state and local funding initiatives to have access to the same quality and quantity of information as those who buy corporate securities.”

Her comments came as other panelists sharply criticized self-regulation of the municipal market, especially through the MSRB, which has regulated muni market dealers since 1975. 

Former SEC chairman Arthur Levitt, who spoke on a separate panel, warned that self-regulation through the MSRB has “all too often come at the expense of the public interest.” He also said the Tower Amendment, which restricts the SEC and MSRB from directly regulating issuers, has left regulatory holes that have been taken advantage of by “many” market participants, including insurers, rating agencies, financial advisers and hedge funds. As a result, the muni market is a “ticking time bomb” that has been left “almost totally unregulated,” he warned. The Tower Amendment was added in 1975 to the Securities Exchange Act of 1934.

“Through multiple scandals and investment debacles, we know regulation through the MSRB simply does not work,” Levitt said, urging lawmakers to “level the playing field” between corporate and municipal securities markets.

Connecticut Democrat Christopher Dodd, the committee’s chairman, said Levitt’s remarks were “very important” and “something that the committee will look at,” adding, “This is a very unregulated area.”

Dodd’s staff, in coordination with other lawmakers and the Obama administration, are in the early stages of drafting legislation to revamp the financial regulatory structure, which could address the need for self-regulatory organizations like the MSRB, according to congressional sources.

Tom Doe, head of research firm Municipal Market Advisors, said in testimony before the committee at a hearing earlier this month that the 34-year period of self-regulation in the muni market should end and the MSRB should be folded into an independent regulator, such as the SEC or the Treasury Department.

Asked about Doe’s testimony by Hawaii Democrat Daniel Akaka, Stack said he took “extreme exception to them” and strongly defended the board.

“We believe the MSRB has worked extraordinarily well,” he said. Among other things, Stack noted that the board has acted to protect investors by pushing for transparency and disclosure systems on its Electronic Municipal Market Access Web site, the muni equivalent of the SEC’s IDEA, the successor to Edgar. “EMMA will serve as a red flag for poor disclosure by issuers, just as it reveals good disclosure practices,” he said.

A large problem, Stack said, is that there are several unregulated intermediaries in the muni market, particularly financial advisers and investment brokers, who are not subject to any of the board’s rules, particularly its Rule G-37 restrictions on political contributions, which is designed to prevent dealers from engaging in pay-to-play practices.

“No other securities regulator has done that,” he said, referring to G-37’s restrictions. “The problem we’ve encountered is that there are many participants in our market that right now are unregulated. If we could regulate those participants, the market will operate well” because every participant would be prevented from pay-to-play contributions. Unregulated advisers and brokers should be subject to SEC registration and MSRB rules, he said.

Stack went even further in written testimony, calling for Congress to consider modifying the MSRB’s authority to include “an enforcement and examination support function that would further strengthen enforcement in the municipal securities market.” Currently, the MSRB writes rules governing dealer conduct, but the rules are enforced by the FINRA.

For her part, Schapiro appeared to throw the MSRB a bone when she was asked generally about SROs by Sen. Mark Warner, D-Va. For the SEC to do its job of protecting investors, it must leverage “third parties,” including self regulators, she said.

Schapiro said she may soon seek help from the committee with legislation to require the registration of hedge funds, as well as bring improvements to the muni market, which she said is “an area that has, far too long, needed more robust oversight.”

She said the SEC plans to soon propose rules for the $9 trillion of mutual funds and other pools of investor money to ensure they benefit investors and “not insiders” and that investors are provided accurate, timely, and complete information about the funds in an investor-friendly form.

Schapiro said the SEC must maintain a “single-minded focus on investors and insuring that our efforts are urgent and aggressive,” particularly as it recovers from the perception that it responded ineptly to the financial crisis, including the $50 billion Bernie Madoff Ponzi scheme.

If the SEC ultimately recommends muni legislation, it is likely to pick up on some of the initiatives pushed by Schapiro’s predecessor, Christopher Cox, who urged Congress in 2007 white paper to boost municipal disclosure and accounting standards.

Though that proposal did not go anywhere in Congress, it led municipal market participants to support the creation EMMA.  

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