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SEC Plans New Office For Munis

JUN 23, 2011 7:03pm ET
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WASHINGTON — The Securities and Exchange Commission would create a five-person office of municipal securities and a 35-member office of credit ratings, both of which would report directly to the chairman as mandated by Dodd-Frank, according to letters the SEC sent lawmakers.

The identical letters, which SEC chairman Mary Schapiro sent earlier this year to the heads of the House and Senate Appropriations subcommittees, seek permission to reprogram fiscal 2011 funds so that the commission can begin to create these and two other new offices mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The requests are still pending, sources said.

Dodd-Frank was enacted almost a year ago. The reprogramming became necessary after Congress passed, and President Obama signed, a continuing resolution that generally kept funding for agencies, including the SEC, at fiscal-year 2010 levels.

“In light of the fact that no additional appropriations have yet been provided for these offices, we have revised our reprogramming request to assume the creation of these offices at reduced levels under a full-year continuing resolution, which will limit the agency’s ability to fully execute the responsibilities of these new offices until additional resources are available,” Schapiro wrote in the letters.

She asked for reprogramming of $612,000 for the muni office, which she said “will coordinate with the Municipal Securities Rulemaking Board on rulemaking and enforcement actions.”

“We plan to transfer three staff members from the division of trading and markets with knowledge of, and expertise in, municipal finance to staff the office,” Schapiro wrote. “As the statutory f­unctions of this office are limited and similar to its current responsibilities, we estimate it will require a total of five staff to fulfill the mission of the office identified in the act.”

The muni office, currently housed with the trading and markets division, already has a staff of four: its chief, Martha Mahan Haines, who is retiring at the end of next week after 12 years, Mary Simpkins, Dave Sanchez and Jack McWilliams. If the office is made independent, sources expect Simpkins, Sanchez and McWilliams would be the transfers and that the commission would hire another staff person as well as a director to replace Haines.

But a report mandated by the Dodd-Frank Act that was prepared for the SEC by the Boston Consulting Group earlier this year questioned the wisdom of creating an independent muni office, saying it would require additional overhead, increase organizational complexity, further fragment the agency and “impede collaboration across offices that perform similar regulatory functions.” 

The SEC had hired a headhunting firm to conduct a search for a director for the muni office, but that search has been put on hold, according to sources.

Schapiro asked for permission to reprogram $1.6 million for the new office of credit ratings, which it said will be staffed with individuals with expertise in municipal as well as corporate and structured debt finance.

“We have allocated a new staff position to permit the hiring of a director, and we plan to transfer 10 staff members — four from the division of trading and markets and six from the office of compliance, inspections and examinations — to staff the office,” Schapiro wrote to lawmakers.

The office will conduct examinations of nationally recognized statistical rating organizations at least annually, she said.

“We wish to note, however, that in order to conduct these examinations, we are drawing resources away from other parts of the examination program,” the SEC chief stressed.

“We estimate that, during the first six months of the fiscal year, examination staff would have performed eight to 10 examinations of broker-dealers and eight examinations of investment advisers had they not been assigned to NRSRO exams. As indicated in our prior reprogramming request, we estimate this office will require a total of 35 to fulfill the responsibilities identified in the act.”

The first six months of the fiscal year would have been Oct. 1, 2010, through March 31, 2011.

The SEC also is asking to reprogram $1.11 million for an office of the investor advocate and $876,000 for an office of minority and women inclusion.

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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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