WASHINGTON — An issuer official and former head of a governmental group strongly refuted the Securities and Exchange Commission’s claims that disclosure and accounting standards for the municipal bond market are lacking and said the SEC simply doesn’t understand the market.
Speaking Tuesday afternoon at the SEC’s first muni field hearing in San Francisco, Ed Harrington, general manager of the San Francisco Public Utilities Commission and former president of the Government Finance Officers Association, said the commission’s concerns about municipal issuers stem from a “grossly simplified view” of the market. He maintained there is no need for the SEC to obtain legislative authority to directly regulate the market, a recommendation that SEC staff could make in its report from the hearings.
“I would encourage you to focus your value-added abilities to the private sector … and less on an already-efficient governmental market, which has an almost perfect record of taking care of investors,” he said, speaking on a panel on “internal controls” at the hearing. Muni issuers, he said, have many internal controls to which they must adhere.
Harrington’s forceful comments reflect issuers’ skepticism about federal attempts to obtain more oversight and control of the muni market. Currently, the SEC regulates muni issuer disclosure indirectly through broker-dealers and only has antifraud enforcement authority over it.
The panel focused partly on the elaborate procedures adopted by San Diego to ensure its disclosures are accurate. The city adopted the procedures after the SEC sanctioned it for material misrepresentations and omissions about its pension and retiree health care obligations in its offering documents for five 2002 and 2003 bond issues.
Stanley Keller, a partner at Edwards Angell Palmer & Dodge LLP in Boston and the former independent consultant and monitor to the city, said it is important for other issuers to craft their own disclosure policies and procedures.
But Harrington said the fact that the SEC is choosing to highlight San Diego seven and eight years after their disclosure problems occurred reflects the fact that “so little has happened since then.”
“I don’t believe any investor in San Diego missed a payment,” he added.
Harrington said the SEC appears primarily concerned about ongoing disclosures related to the financial health of states and localities, especially when it comes to pensions, and would like issuers to publish quarterly and more timely financial reports. But he argued that approach is “flawed” because it assumes “the only way” that investors get muni financial information is through official financial statements.
“Have you seen the most recent financial statements from the state of California? Probably not. Has this stopped you from having an opinion about its financial strength? I don’t think so, because every day you hear about it in the newspapers and various other media,” he said.
SEC commissioner Elisse Walter said she understands many governments are not releasing financial data they already produce for internal purposes. The SEC wants to encourage them to release it, she said.
But Harrington said most governments are “constantly” making information available to the public, through their own websites as well as through the Municipal Securities Rulemaking Board’s EMMA site. California entities are required to make vast quantities of information public through sunshine laws, he said.
But Walter said there is a big difference between having to request information and having it immediately available, particularly for retail investors.
While Harrington said SEC officials seem afraid of “a dramatic, unforeseen turnaround” in the financial strength of public entities, that view does not accurately reflect how the muni market works, he said. “Most governments are like aircraft carriers. It takes us a long time to turn.”
For example, he noted that his commission has sold over $1 billion of debt in the last three months. Investors buy the bonds knowing they are backed by revenue from an essential commodity — water — delivered to a geographically diverse service area of relatively affluent customers. Though the commission has relatively low to moderate rates, it has demonstrated a willingness to raise those rates if needed. “None of those things are likely to change at any fast clip,” he said, and if they did, the SEC’s existing rule 15c2-12 on disclosure already requires issuers to disclose material changes in their finances.
Harrington argued the muni market is among the safest in the capital markets. “When the markets you regulated failed over the last several years, investors rushed to our market — a classic flight to quality — because governments rarely tend to go bankrupt, default, or stop paying our debt,” he said. “If you and your sister agencies could instill the same confidence in capital markets that investors apparently have now under existing checks and balances in our markets, we would all be better off.”
