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SEC Looks to Target Tower Amendment

MAY 13, 2009 1:00am ET
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WASHINGTON - The Securities and Exchange Commission may propose legislative and regulatory initiatives this summer to repeal the so-called Tower Amendment and give the SEC greater control over municipal disclosure and accounting standards, a commission official said yesterday.

Mary Simpkins, senior special counsel in the SEC's office of municipal securities, said that the commission may seek the repeal of Tower to obtain three goals: greater control of municipal accounting standards, the regulation of market intermediaries, and possibly changes to the composition of the Municipal Securities Rulemaking Board that would make it a more "independent" self-regulator.

Currently, two-thirds of the 15-member board is made up of bank and securities dealers.

In addition, Simpkins said the SEC would likely seek explicit authority from Congress to regulate the muni market directly, "because just repealing Tower would not be enough." For instance, she said, even without Tower, municipal securities would remain exempt from SEC registration requirements under the Securities Act of 1933.

SEC chairman Mary Schapiro recently said she wants muni disclosure to be more like corporate disclosure in terms of quality and timeliness.

"We're brainstorming potential reforms," she said in an interview with The Bond Buyer, elaborating on remarks made last week at a conference sponsored by the National Federation of Municipal Analysts in Seattle.

Though the specifics of the proposal are "a work in progress," Simpkins said that Schapiro wants to "aggressively pursue improvements" to the muni market. The possible changes are at the staff level and the five-member commission has not yet considered them, she said.

But municipal market participants have essentially all agreed that getting Congress to repeal Tower would be an uphill battle politically.

The Tower Amendment restricts the commission as well as the MSRB from directly or indirectly requiring muni issuers to file documents with them before their securities are sold.

Congress in 1975 added the amendment, which was sponsored by the late Sen. John Tower, a Texas Republican, to the Securities Exchange Act of 1934. As a result, the commission places disclosure requirements and burdens on the underwriters of municipal bonds, rather than issuers.

"Historically, it has been difficult to seek repeal of the Tower Act with Congress," said MSRB executive director Lynnette Hotchkiss, who added: "If anyone can tackle this very tough issue, it's Mary Schapiro."

In any event, issuers remain opposed to such changes, arguing in part that because municipal bonds rarely default, there is no need to burden issuers with onerous new requirements.

"We're strongly opposed to any attempt to overturn Tower," said Frank Hoadley, Wisconsin's capital finance director and the chairman of the debt committee of the Government Finance Officers Association, which represents finance officers in about 17,500 states and localities in the U.S. and Canada.

Hoadley said that while the GFOA believes that the MSRB's composition may be outdated for today's realities and that unregulated market intermediaries such as financial and swap advisers should fall under some regulatory scheme, "exactly how these things tie to Tower, no one has made clear."

"There's this mantra that Tower somehow exempts issuers from regulation and that's simply not true," he added, noting that issuers are subject to the securities law antifraud provisions.

For years, the SEC and investor groups have sought more robust disclosure standards, citing the growth in size and complexity of the muni market since Tower was adopted.

Two years ago, then-SEC chairman Christopher Cox urged Congress to consider a list of broad initiatives to improve muni disclosure and accounting standards, though only one - the creation of a central repository - gained any traction among market participants.

But supporters of tougher standards for the muni market argue there has never been a better time to push for them while the entire financial regulatory structure is in play.

"The climate for new regulation is a lot stronger now," said one. "If you're not going to do it now, when are you going to do it?"

Another market participant who asked not to be named argued that the SEC should go even further than the possible changes outlined by Simpkins. The regulation of market intermediaries should encompass all market participants that aren't regulated at the federal level, including bond attorneys.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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