WASHINGTON — Municipal market regulatory issues will not be studied for up to two years under changes to the base legislation Senate and House conferees are using to reconcile their competing legislative proposals to overhaul financial regulations.
The base text conferees are using as a starting point in their negotiations is a slightly amended version of the bill approved by the Senate last month that calls for three muni market studies, including a Government Accountability Office review of municipal disclosure issues. Lawmakers hope to hammer out and approve a final regulatory reform package by July 4.
Ahead of the conference committee’s first meeting last week, Senate and House staff agreed to extend the deadlines for two of the studies to accommodate the GAO, which is inundated with more than 50 mandates between the House and Senate versions of the legislation.
Orice Williams Brown, the GAO’s director of financial markets and community investment, confirmed Friday that the congressional watchdog had asked for flexibility in starting and completing so many reports.
The GAO will now have a full two years — rather than just one — to report to Congress on the distinctions between corporate and municipal disclosure requirements and to recommend whether the so-called Tower amendment should be repealed.
The amendment was added in 1975 to the Securities Exchange Act of 1934 and prohibits the Securities and Exchange Commission and the Municipal Securities Rulemaking Board from requiring muni issuers to file disclosure documents with them before the sale of securities.
At least two current SEC commissioners — Elisse Walter and Luis Aguilar — have urged a repeal of Tower and for Congress to give the SEC direct authority over municipal issuers, though states and localities strongly oppose such changes.
Market participants speculated Friday that delaying the report on muni disclosure would likely push back any legislation sought by the SEC to give it greater authority over the municipal market. Its enforcement authority is currently limited to the antifraud provisions of the securities laws and it regulates municipal disclosure indirectly through dealers.
While the likelihood of a full repeal of Tower is practically zero given issuer and lawmaker opposition, the SEC could achieve many of the regulatory changes it would like without touching the amendment, market participants have said, noting that it only limits the SEC from imposing a pre-sale review system of bond documents, which SEC officials do not want for muni issuers anyway.
Last month, the SEC announced that Walter will host a series of field hearings throughout the country to help the commission design a regulatory regime specifically for the needs of the municipal securities market. As of last week, SEC staff were still discussing the details of and schedule for the hearings.
The GAO deadline for completing a second study called for in the Senate bill, examining trading and transparency in the municipal market, was extended to up to 18 months from enactment of the regulatory reform law, rather than 180 days. However, the GAO would still have to update key congressional committees on its progress after 180 days.
Meanwhile, staff left unchanged the deadline for the third muni-related study that would require the SEC to report to Congress within 270 days on the Governmental Accounting Standards Board.
Market participants noted that the base text includes some additional changes to MSRB oversight. Specifically, the board would only be allowed to fine dealers that fail to submit required documents, a change from an original proposal that would have allowed it to fine dealers for violations of any of its rules. The provision was changed out of apparent concern that it would lead to duplicative fines with the Financial Industry Regulatory Authority, which enforces MSRB rules. Similarly, the board would be authorized, but not required, to assist other federal regulators in the enforcement of its rules.
However, under the base text, the MSRB would receive a specific share — one-third — of all fines collected by FINRA for violations of board rules, unless another percentage is agreed to by the SEC.
The legislation also would codify existing practice at the board by formally prohibiting it from charging issuers to submit documents to it or to charge a fee to obtain any individual documents from its website.