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SEC Muni Report Advances

SEP 27, 2011 7:54pm ET
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Securities and Exchange Commission staff are pressing forward with a final municipal advisor registration scheme and a report that will recommend improvements in disclosure and other areas of the muni market, commissioner Elisse Walter said Tuesday.

Walter is spearheading a commission-wide review of the muni market, which is slated to result in a report with recommendations for legislative and regulatory changes. She made the remarks during a municipal bond summit in New York sponsored by the Securities Industry and Financial Markets Association. She was in the SEC's Washington, D.C., headquarters and addressed the conference by video.

Her comments came as market participants are looking to the SEC to finalize a permanent muni advisor registration scheme and rule, including a final definition of municipal advisor. The commission's proposed registration scheme, floated for comment late last year, included a very broad definition of muni advisor, drawing complaints and triggering more than 1,000 comments.

"We want to hear where you agree with us and where you think we're crazy," Walter said. "So keep coming in."

Walter said SEC staff are now actively working on the report, which will be the culmination of a series of field hearings the agency held across the country beginning late last year. The last one was held in Birmingham, Ala., on July 29.

"We have really moved from the hearing stage and the evidence-gathering stage to the recommendation-formulation stage," Walter said.

She said it's too early know what the staff will recommend, but the report will focus on "two core issues" in the muni market: the need for further improvements in the timing and quality of disclosure and for enhanced transparency in the secondary market.

Although she did not say when the report will be completed, she added that the recommendations would not be "pie in the sky."

"We're looking for incremental changes that will really move forward in this area," she said.

Walter also said she would like to see the industry move forward with voluntary initiatives, particularly on pricing of bonds, where retail investors in particular lack comfort, she said.

In addition, Walter repeated her call for Congress to increase the SEC's authority so that it could set "baseline disclosure requirements."

The Tower Amendment to the Securities Exchange Act of 1934 prohibits the SEC and the Municipal Securities Rulemaking Board from requiring muni issuers to file pre-sale disclosure documents.

A draft bill being circulated by Reps. Mike Quigley, D-Ill., and Patrick McHenry, R-N.C., however, would authorize the SEC to require issuers to disclose primary and secondary market bond documents directly or indirectly through dealers or others. It would also give the commission authority to direct the content and timing of those documents.

A bond lawyer who spoke at a panel on primary market dynamics criticized the draft bill. "It's the most intrusive attempt to legislatively regulate the municipal market since efforts were made in 1975 to 1976," John McNally, a partner at Hawkins Delafield & Wood LLP in Washington and president of the National Association of Bond Lawyers, said in an interview.

In particular, McNally said, the bill would give the SEC authority to require issuers to prepare official statements and continuing disclosures. It would also authorize the agency to establish the content of official statements and continuing disclosures and the frequency of continuing disclosures.

Currently, since the SEC lacks direct authority over the content of municipal disclosure, it regulates disclosure indirectly through its authority over underwriters. McNally noted.

The Quigley-McHenry draft bill would give the SEC authority over issuers' disclosure, but would do so without violating the Tower Amendment, because it does not require issuers to file documents with the commission, McNally added.

Rather, the bill contemplates that issuers would furnish documents, such as interim financial reports, to investors — something that could be accomplished by filing them on the MSRB's EMMA website, bond attorneys have said.

Leslie Norwood, a SIFMA managing director and co-head of its muni securities division, questioned whether the SEC needs authority to enforce compliance with issuers' continuing disclosure agreements. In response, Walter reiterated, as she said earlier this spring, that she doesn't think the commission would need to recommend a repeal of the Tower Amendment. Rather, she said, it should set disclosure standards, and with that should come an "enforcement mechanism."

In addition, Walter said the final muni advisory registration scheme and definition are "very much on the front burner."

The temporary registration rules expire at the end of the year, but they could be extended if necessary, she added. In the interim, Walter said, market participants who want to prepare for the final rule should study the MSRB's recent muni advisor rule filings, including five proposed rules that the board recently withdrew.

"People who have not previously been tuned into what that board is doing really should pay attention," she said.

Separately, Walter said the SEC's muni hearings revealed "certain softnesses in practices."

She said state and local governments need better training in municipal disclosure and better disclosure practices. In addition, she noted there are significant conflicts of interest that affect the pricing of swaps, as well as indications many muni officials do not understand swaps.

Walter said she also wants to persuade the SEC to take a "long-term, deep-dive look" at the fixed-income market and its current structure, but added that such a study and any resulting recommendations may not be completed until after she leaves the commission.

Walter was sworn in as commissioner on July 9, 2008. Her term expires in June 2012.

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