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Securities Law

SEC Muni Report Seeks 15 Major Legislative, Regulatory Changes

WASHINGTON — The Securities and Exchange Commission issued a long-awaited report on the $3.7 trillion municipal securities market Tuesday that recommended at least 15 major legislative and regulatory changes to improve disclosure and price transparency for retail and other investors.

The recommendations include asking Congress for authority to establish enforceable disclosure standards for muni issuers, allowing the Internal Revenue Service to share muni audit information with the SEC, urging the Municipal Securities Rulemaking Board to require dealers to execute muni orders at the best possible prices, and disclosing markups and markdowns of riskless principal transactions.

The 165-page report is the culmination of some two years of work spearheaded by SEC Commissioner Elisse Walter, who presided over a series of public hearings on the market and, along with commission staff, met with dozens of market participants and considered dozens of written comments on improvements that could be made.

"This market simply hasn't gotten the attention it deserves given its significance," Walter told reporters during a conference call.

She noted that more than one million muni offerings are outstanding, sold by around 44,000 issuers, and that 75% of the bonds are held by retail investors, either directly or indirectly through mutual funds.

As expected, the report does not recommend wholesale repeal of the Tower Amendment or exemptions from federal securities laws. The Tower Amendment prohibits the SEC and MSRB from requiring issuers to file documents with them before offering munis and bars the MSRB from requiring any issuer filings.

The report does not call for "granular, prescriptive disclosure," but rather recommends "principles-based" changes, Walter told reporters, noting the SEC is fully aware of the wide differences among municipal issuers and between muni and corporate issuers.

"We're going to go forward with what we recommend," Walter told reporters when asked if the report will have legs. The SEC and MSRB can act on regulatory recommendations and the SEC is "hopeful" that the report and recommendations "will receive serious consideration" from Congress, she said.

MSRB chairman Alan Polsky said: "We will review the recommendations of the SEC report as part of our ongoing effort to facilitate municipal market transparency, improve disclosure and ensure a fair and efficient market."

While several news organizations wrote that the SEC report would raise questions about indexes used in the muni market — and particularly the Municipal Market Data index published by Thomson-Reuters — it does not. The report merely describes market indexes and notes that they are based on "objective facts" and "subjective assessments."

Municipal Market Advisors officials raised questions about the MMD index in a letter sent to the SEC on June 14, 2011. The MSRB announced Monday that is reviewing muni indexes with the aim of providing information to investors on how they are developed and used. Thomson Reuters officials have said they are discussing the MMD index with the SEC and MSRB.

Investors and analysts generally applauded the SEC recommendations, while broker-dealer officials — who liked some of the recommendations — and issuers warned about the costs and burdens they would create. However, issuers do like the recommendations for more price transparency.

Bart Mosley, co-president of Trident Municipal Research, which represents investors, favors disclosure improvements but said the SEC should have provided more specific recommendations in this area.

Greg Clark, the past chairman of the National Federation of Municipal Analysts, generally favors the disclosure recommendations in the report, which he said could improve market efficiency and help analysts, rating agencies, investors at mutual fund and others evaluate issuers.

A senior muni credit analyst at Concordia Advisors, Clark said the recommendations could bring much needed disclosure uniformity to a market in which the quality and timeliness of disclosures vary widely among issuers.

He said he supports the "safe harbor" for issuers that publish forward-looking statements, too, saying the recommendation could encourage issuers to divulge events that could impact them in the future. Clark also called recommendation for uniform accounting standards a good move.

"If you want to sell securities to the market, [issuers'] accounting standards should be comparable," he said.

Leslie Norwood, co-head of the muni securities division at the Securities Industry and Financial Markets Association, applauded the depth of the report and noted that SIFMA supports efforts to improve the quality and timeliness of issuers' disclosures.

Specifically, she said SIFMA backs the recommendation that SEC be given authority to require trustees or other entities to enforce the terms of continuing disclosure agreements.

Such authority, she said, could shift that burden away from dealers, who are prohibited by the SEC's Rule 15c2-12 on disclosure from underwriting munis unless the issuer agrees in writing to make annual financial and other disclosures.

But Norwood expressed concern that the report could lead to new requirements related to the disclosures underwriters must make to issuers.

She warned that requiring that issuers follow generally accepted accounting principles set by the Governmental Accounting Standards Board could interfere with state accounting laws and could increase dealers' expenses. Dealers are required to help fund GASB and she worries that dealers' fees could increase if GASB's budget were to "spiral out of control."

Mike Nicholas, chief executive of Bond Dealers of America, said in a statement that BDA supports transparency improvements, but added that benefits of new regulations must be weighed against costs. He said regulators must ensure the rules don't compromise market liquidity or inhibit legitimate trading activity.

"Everything comes at a cost," he said.

Timothy Firestine, president-elect of the Government Finance Officers Association, warned some of the legislative recommendations could be "overburdening" to municipalities.

"Let's not layer a whole new regulatory regime on top of municipal issuers," said Firestine, who is also chief administrative officer of Montgomery County, Md.

Issuers already release a "tremendous" amount of information about budgets, finances and the general health of their communities, he said.

Firestine opposes requiring issuers to follow GASB accounting standards, or SEC rules that would govern deadlines and content of financial disclosures. Such rules could mean more work for issuers and could mean some must hire additional employees.

He said there seems to be a "lack of understanding" among regulators about the work required to complete financial statements. For instance, he said his county can't issue financial statements until it receives financial information from school districts and other entities.

But Firestine does supports efforts by the SEC to improve price transparency, which he said can help ensure issuers receive better prices.

Tom Dresslar, spokesman for California state Treasurer Bill Lockyer, said his office is grateful the SEC did not recommend appealing the Tower Amendment.

He said he "no problem" with the SEC setting disclosure standards, so long as the commission recognizes the "diverse nature" of the issuer community.

Dresslar added that he is "encouraged" the report recommends taking a "principles-based approach" to disclosure and does not seek "detailed line-item disclosure requirements." But he said he is not thrilled by the idea of the SEC overseeing the content of financial statements.

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