SEC Looks To Muni Experts

WASHINGTON — The Securities and Exchange Commission wants to hire outside municipal market experts, including traders and investment bankers, to work in its reconstituted municipal and public pension fund enforcement unit, Elaine Greenberg said Friday.

Greenberg, an associate regional director in the SEC’s Philadelphia office who is heading the new unit, said in an interview that the commission is just beginning the process of staffing up the unit, which was formally created in January along with four other specialized enforcement units. The new units will create a much more structured and rigorous process for SEC officials to pursue muni cases.

Greenberg could not say how large the unit will become, though its deputy chief is Mark Zehner, a regional municipal securities counsel who also works out of the Philadelphia office.

Greenberg told securities attorneys gathered here for the annual Practising Law Institute’s “SEC Speaks” conference that despite the size and importance of the muni market, it is “very thinly regulated,” and one method of policing it is through an enhanced enforcement response using the SEC’s antifraud authority.

To that end, she said, the new enforcement unit will focus on developing strong cases about particular conduct, “cases that will have an impact on the behavior of market participants and will have a high deterrent effect.”

Closely mirroring comments she made last month when the new unit was formally announced, Greenberg said: “Through the unit we plan to build a comprehensive municipal securities and public pension enforcement program where we will develop the case law and legal precedent through the high-impact cases that we bring.”

She added that the SEC staff will “actively seek the market activities that pose the greatest risk of harm to investors and are indicative of potential violations.”

She said the unit will be focused on five areas of misconduct: offering and disclosure fraud; tax or arbitrage-driven misconduct; pay-to-play and public corruption violations; public pension accounting and disclosure violations; and valuation and pricing fraud.

Following her remarks, commissioner Elisse Walter, a Democrat, said she has a special interest in and concerns with the municipal market, but is “particularly pleased” that one of the five new enforcement units will focus on it. She said the muni market is enormous “but operates with increasing participation from retail investors, yet there has been relatively little public attention given to it in recent days.”

Earlier in the conference, SEC chairwoman Mary Schapiro highlighted a packed agenda for the in the coming year. Though she talked about the SEC’s proposed changes to its Rule 15c2-12 to increase the quantity and timeliness of municipal disclosure, she told reporters following her remarks that she is not sure when the proposal will be voted on by the full commission.

She said the SEC would likely adopt another set of credit rating agency rules that would create an even more robust regulatory framework for agencies registered as nationally recognized statistical rating organizations. The framework would include “further measures designed to improve the quality of ratings by requiring greater disclosure, fostering competition, helping to address conflicts of interest, shedding light on rating shopping, and promoting accountability,” Schapiro said.

The SEC staff also are examining several possible rule changes tied to the $4 trillion money market fund industry, some of which are controversial, including the possibility of moving to a floating, rather than a stable, $1.00 net asset value for fund shares, which the industry opposes.

Schapiro said the SEC would work with self-regulatory organizations to create a “consolidated audit trail” that better enables its investigators to find wrongdoing in trading activity.

She said SROs currently have their own separate audit trail systems to trace order information in their respective markets, but it’s difficult to connect the dots and detect wrongdoing across various markets.

“It is like trying to put together a jigsaw puzzle, but only being able to see a small part of the final picture,” Schapiro said. “To see the complete picture, with today’s fast, electronic and interconnected markets, here is a heightened need for regulators to have access to a robust and effective consolidated order and transaction tracking system.”

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