WASHINGTON — Issuers vowed to resist a draft bill that would authorize the Securities and Exchange Commission to require them to disclose primary and secondary market bond documents and direct the content and timing of those documents, saying it would open the door to unfettered regulation of their disclosures.
But some market participants reacted more cautiously, saying the bill could benefit the bond market and taxpayers.
The bill, which is being drafted by Rep. Mike Quigley, D-Ill., is not final and is currently being circulated to regulators and market participants for input. Called the Municipal Securities Transparency Act of 2011, the bill would require corporate conduit borrowers to register with the SEC and meet its corporate disclosure requirements. It would subject municipal securities to the Trust Indenture Act of 1939 and allow the commission, if necessary to protect investors and the public interest, to impose a temporary 10-day trading suspension in any municipal bond.
The draft legislation, which stems from conversations between Quigley and regulators earlier this summer, comes four months after SEC commissioner Elisse Walter said the commission should seek authority to set “baseline” disclosure standards in the primary and secondary markets. Walter, who is spearheading an SEC muni market review slated to culminate in a report later this year that will call for legislative changes to improve disclosure, has made clear there are limits to what the agency could do without legislation.
But issuers slammed the bill as a draconian intrusion into the timing and content of their disclosure, long exempt from direct SEC oversight.
“The devil’s in the details, but if this legislation passes, it would open the door to unfettered regulation of the municipal bond industry,” said Frank Hoadley, Wisconsin’s capital finance director and a member and former chair of the Government Finance Officers Association’s debt-management committee. “It appears to open up the statutory authority and then it’s up to people in offices in Washington to create the devil.”
The Tower Amendment to the Securities Exchange Act of 1934 prohibits the SEC and the Municipal Securities Rulemaking Board from requiring issuers to file disclosure documents with them before selling muni securities. Quigley’s bill, as currently drafted, would not require issuers to file disclosure documents with the SEC, but, according to bond attorneys, it does appear to give the agency discretion to require issuers to furnish such disclosure documents electronically, such as by posting them on their own websites or by posting them on the MSRB’s Electronic Municipal Market Access site.
“The spirit of [the bill] flies completely in the face of the intent of the Tower Amendment,” said Hoadley.
He predicted the bill would make access to credit more expensive for small and infrequent issuers, who would have to hire additional experts to advise them on municipal offerings. Hoadley would prefer to boost issuers’ disclosure practices through voluntary industry efforts, including GFOA training. “It’s bitterly disappointing to see this,” he said. “It’s like, what planet are these people on?”
Several other issuers and issuer groups questioned the need for the legislation, saying state and local governments already vet bond deals through public processes, such as hearings and disclosure documents filed on EMMA.
“We’re not certain why Congress needs to involve itself in this issue,” said Lars Etzkorn, program director of the center for federal relations for the National League of Cities.
Others signaled the bill would face resistance, if introduced. “GFOA will be concerned with any proposal that imposes SEC regulation over the content or timing of municipal disclosure,” said Eric Johansen, city treasurer of Portland, Ore. and chairman of GFOAs debt management committee. “On the surface, it does some things we have been very much opposed to in the past.”
Another issuer group telegraphed similar concerns.
“I think we’d be happy to have a discussion with Quigley and any others who are supportive of this,” said Mike Belarmino, associate legislative director of the National Association of Counties.
In particular, issuers and issuer groups raised concerns about whether state and local governments, many of whom have had to reduce staffs and shed employees, could afford the expense of additional regulatory scrutiny, such as hiring attorneys or other professional advisors to prepare additional disclosures.
“We’re not against transparency, but there’s got to be some recognition we’re working from a very limited standpoint,” said Belarmino.
An issuer echoed this view.
“If I had to do quarterly reports, I’d have to add more staff,” said Timothy Firestine, chief administrative officer of Montgomery County, Md., and a member of GFOA’s debt management committee.
“We just cut 1,000 people,” said Firestine, who noted his county has shed 10% of its workforce in the past three years.
Quigley, who sits the House Oversight and Government Reform Committee and the House Judiciary Committee and was unavailable for an interview, said in a release, that the municipal market is “a bedrock of public finance.”
“Our goal is to require enhanced transparency in the municipal securities market so investors have as much information as possible at their disposal and are able to compare issuers on the basis of standardized disclosure about their long-term financials,” he added.
Ryan Minto, a spokesman for Rep. Patrick McHenry, R-N.C., who sits on the House Financial Services Committee and chairs the Government Reform Committee’s panel on TARP, financial services and bailouts of public and private programs, said McHenry is working with Quigley on finalizing language of the bill.
Still, some market participants reacted with caution, adopting a wait-and-see approach.
Conceptually, the bill could benefit the muni market and taxpayers, according to Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management in Oak Brook, Ill., adding that disclosure reform has historically been a “hard sell.”
“It seems like it should be something most would embrace,” Ciccarone added. “Hopefully, everyone else can agree on the details.”
Analysts, who have in recent months stepped up calls for better disclosure, said they would review and follow the bill.
The Investment Company Institute “has repeatedly called for improvements to disclosure in the municipal securities markets to ensure that investors have current and meaningful information to make informed investment decisions,” Heather Traeger, associate counsel, wrote in an email. “The bill purports to enhance the SEC’s authority regarding municipal disclosure, so we are closely reviewing it.”
A muni analysts’ group declined to comment on Quigley’s bill, reiterating its goal of better disclosure.
“We hope that any legislation or regulation at the federal level will focus on the timeliness and availability of disclosure rather than on its exact content, and that such federal initiatives would in no case be detrimental to bondholders,” Greg Clark, chairman of the National Federation of Municipal Analysts and senior municipal credit analyst at Concordia Advisors LLC in New York, wrote in an email.
Dealer groups, meanwhile, also voiced a more measured response.
Michael Decker, managing director and co-head of the muni securities division of the Securities Industry and Financial Markets Association, said it would be “premature” to comment on the bill, but noted that “issues surrounding disclosure regulation in the municipal market are complex and SIFMA and its members are very focused on this important matter.”
Bill Daly, senior vice president of government relations for Bond Dealers of America, said providing meaningful, timely and useful disclosure, especially continuing disclosure, is important to all market participants and vowed to “continue to work with everyone to find a way to improve” it.
Meanwhile, an advisor who had not reviewed the bill questioned why it would require for-profit conduit borrowers to register with the SEC, but not entities such as nonprofit health care providers that have historically had disproportionately high default rates. “It continues to amaze me why regulators and legislators miss the most important sectors of the market in terms of improving investor protection,” said Robert Doty, president of American Governmental Financial Services Co. in Sacramento.
