SEC to Muni Market: Tell Us What You Think

WASHINGTON — Securities and Exchange Commission officials are urging market participants to provide their views about the muni industry and how it can be improved, after the SEC was forced by budget cuts to suspend a series of field hearings that were to be held around the country.

The ongoing commission-wide review of the municipal market is expected to result in a report that may recommend legislation, rulemaking, and changes in industry practices.

“We’re trying to cobble together a plan so that we can keep moving,” SEC commissioner Elisse Walter said in a recent interview.

Last year, Walter presided over two field hearings in San Francisco and Washington, D.C., the first in a series of nationwide panels designed to examine the municipal securities market and provide input for the staff report.

However, the remaining muni-field hearings that were slated to be held in Birmingham, Ala., Tallahassee, Fla., Chicago, and Austin have been shelved due to budgetary constraints.

“It’s a disappointment,” said Robert Doty, president of American Governmental Financial Services in Sacramento. “I think it would be beneficial to have the hearings and gather the information.”

For months, the SEC has operated amid uncertainty over the budget for its current fiscal year, which began on Oct. 1.

Earlier this month, chairman Mary Schapiro testified before a securities panel of the Senate Banking Committee in support of President Obama’s fiscal 2012 budget, which requests $1.43 billion for the commission.

A fiscal 2011 continuing resolution proposed by House Republicans would provide the SEC with only $1.095 billion, a 2% reduction from its fiscal 2010 budget of $1.12 billion.

Last week, in testimony before the House Appropriations subcommittee on financial services, Schapiro said the SEC’s 2012 budget request is designed to help the agency hire new staff, implement requirements imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, and invest in information technology.

Schapiro has also told Congress the agency needs to hire close to 500 staffers to implement Dodd-Frank, including 35 new hires to focus on municipal securities and muni-adviser registration exams.

Even before Dodd-Frank, Walter had begun the review of the muni market, with the goal of improving its disclosure, among other things.

Though the hearings have been halted, Walter is pressing forward from the SEC’s Washington headquarters to continue the review, working with an agency-wide muni team whose members hail from several divisions, including enforcement, the chief accountant’s office, and the office of compliance, inspections and examinations.

The core group consists of Kayla Gillan, deputy chief of staff to Schapiro; Martha Mahan Haines, chief of the municipal securities office; Amy Starr; chief of the office of capital market trends; and Alicia Goldin, special counsel in the division of trading and markets.

Walter and her staff are also culling information from market participants through conversations, meetings, and letters. The staff is even trying to set aside certain times to be available for teleconference calls.

The SEC’s website invites interested parties to submit comments by e-mail to: munifieldhearings@sec.gov.

Specifically, the SEC is seeking input on such topics as disclosure, derivatives, credit ratings, bond insurance, Build America Bonds, investor experience, municipal advisers, pricing and quotation issues, public pensions, sales practices, self regulation and small issuers.

But without the hearings — where witnesses testified on panels organized around specific issues — the commission’s fact-gathering process has been hampered.

Since last September, when the SEC held its first field hearing, fewer than two dozen muni comment letters have trickled into the commission, according to its website. The majority were filed on or around the hearings.

Roughly half the comment letters have been filed by industry groups and experienced participants and observers, including a municipal financial adviser, a former SEC attorney and an economics professor at Syracuse University.

In a five-page comment letter filed last October, the National Federation of Municipal Analysts made recommendations for improving muni-market disclosure.

In the primary market, the NFMA said, offering documents for new issues should include the most recent audited financial statements and annual operating information, as well as unaudited quarterly or semiannual financial and operating information.

In the secondary market, where disclosure remains “spotty,” the NFMA said, issuers should release more timely annual disclosure, interim financial disclosure, and more timely and complete material event notices.

“We feel strongly that the commission should take the steps necessary to provide investors in all outstanding municipal debt the comfort of knowing that after they have purchased a municipal bond that they will have access to timely and complete information with which to make ongoing decisions regarding those investments,” the NFMA said.

Representatives from Wells Fargo Advisors, the American Federation of State, County and Municipal Employees, and the AFL-CIO have met with Walter and her staff about the muni market, according to meeting memoranda posted on the commission’s website.

In addition, roughly 10 individual investors have submitted comment letters. Their observations span a range of issues, from pleas for pricing transparency and better disclosure to concerns about possible municipal bankruptcies.

“Municipal bond insurance has disappeared, my triple-A ratings have disappeared, and now some bonds are trading for cents on the dollar and some have defaulted!,” William Laudani, a retired senior citizen and municipal bond investor, told the SEC in a comment letter in November.

“This situation should never [have] been allowed to happen. I blame our federal government and its agencies for this decline in America. This situation needs to be addressed at the highest levels and appropriate action taken in a timely manner.”

Among attorneys, though, reaction to the field-hearing hiatus is measured.

“Something is lost, but there are alternate but less-efficient ways of achieving the same input,” said John McNally, a partner at Hawkins, Delafield & Wood LLP in Washington. McNally, president of the National Association of Bond Lawyers, testified at the San Francisco field hearing.

Others questioned whether the SEC even needs them.

“I don’t think having the hearings or not will be an impediment to having the report out,” said Charles Samuels, a partner at Mintz, Levin in Washington.

Meanwhile, the SEC is also updating a 1994 interpretive release governing disclosure obligations of muni market participants under the anti-fraud provisions of the federal securities laws. The revamped guidance will take into account technological advances and changes in common market practices since the mid-1990s.

“Some of it’s saying, 'We really mean it,’ ” Walter said. “I think we can make a difference again.”

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