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Securities Law

Obama: Walter to Succeed Schapiro as SEC

NOV 26, 2012 12:04pm ET
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WASHINGTON — President Obama on Monday designated Elisse Walter, a proponent of increased regulatory oversight of the municipal bond market, as the next Securities and Exchange Commission chairman.

The announcement was made soon after Mary Schapiro announced she would step down as chairman on Dec. 14.

Walter, one of two Democrats on the five-seat commission, will take the SEC’s helm when Schapiro, a political independent, departs.

Walter’s term as a commissioner expired in June, but she can remain at the SEC up to 18 months after her term expires, meaning she can serve as chairman until December 2013, according to an SEC spokesman. To stay longer, Walter would need to be appointed for another term and confirmed by the Senate.

Appointed in January 2009, Schapiro was scheduled to serve until June 2014, but for months she has been rumored to be ready to depart.

The first female SEC chairman, Schapiro joined the commission during the financial crisis and led the agency as it implemented new regulations required by the Dodd-Frank Act, which was enacted in 2010.

The SEC touted muni actions during Schapiro’s tenure.

The agency filed more than twice as many muni-related enforcement actions in fiscal year 2012 than in the previous year and expanded its Rule 15c2-12 on disclosure, which prevents dealers from underwriting bonds unless the issuer has contractually agreed to make continuing disclosures.

In 2010, the SEC passed temporary registration rules for municipal advisors, as required under Dodd-Frank, but did not finalize those rules this year, drawing widespread industry criticism.

In September, the SEC restructured its office of municipal securities, another Dodd-Frank requirement, so that it reports directly to the SEC chairman, not the trading and markets division.

Schapiro hired John Cross, formerly a Treasury associate tax legislative counsel, to head the office.

In July, the commission made legislative and regulatory recommendations for improving the muni market in a lengthy report written by the SEC staff under Walter. Among them: a request for legislative authority to set the content and timing of issuers’ financial disclosures, and to require certain conduit corporate borrowers to meet corporate-style registration and disclosure standards. Currently, the SEC regulates muni disclosure indirectly through dealers.

The report also made a number of recommendations aimed at increasing transparency of pre-trade muni prices.

Andrew Kintzinger, a bond attorney with Hunton & Williams, called Schapiro’s departure a “loss for the market,” saying she has a significant regulatory background and a “special understanding of the treatment of munis under the law.”

Schapiro had close working relationships with Walter and officials in the SEC’s division of corporation finance, like director Meredith Cross, John’s wife, and senior special counsel Amy Starr, Kintzinger added.

“You always knew — when you were dealing with commissioner Walter or other members of the SEC — that they were communicating with chairman Schapiro,” he said.

Kintzinger praised Schapiro for establishing the independent muni office prior to departing, an accomplishment that “highlighted that she did view munis as important to the SEC.”

Ben Watkins, Florida’s director of bond finance, praised Walter as knowledgeable in muni issues and said the field hearings she held with market participants in recent years indicates her “willingness to listen.” He noted a “softening” in Walter’s stance on disclosure in recent years, and she no longer calls for the repeal of the Tower Amendment.

Watkins said issuers still should oppose more-stringent regulation of disclosures. But he noted that, as chairman, Walter will face more-pressing, non-muni related challenges. “There are more important objectives for the SEC to accomplish than making changes in munis,” he said.

Paul Maco, a bond attorney and former head of the SEC’s municipal securities office, said Walter will have the ability, as chairman, to “make good” on the agency’s goal of completing the MA definition early next year.

Maco, now an attorney at Bracewell & Giuliana LLP here, said the recommendations in the SEC municipal report, including requests for new legislative authority, are likely long-term goals that may not be addressed before the end of Walter’s term.

While no major opposition to the suggested recommendations has surfaced in Congress, no lawmakers have stepped out to champion the measures, according to Maco.

The next chairman, whether it be Walter or someone else, will likely be the one to advance the recommendations, he said.

Maco said Schapiro faced unprecedented challenges during her term, including the financial crisis, the collapse of major dealers and the Bernard Madoff ponzi scheme scandal.

Ken Bentsen, executive vice president of public policy and advocacy at the Securities Industry and Financial Markets Association, said he expects a fairly smooth handoff from Schapiro to Walter, who knows the issues well and has similar views as Schapiro.

“I assume that’s one of the reasons the president chose to designate her as chairman. It’s consistent with administration policy,” he said. While Walter may seek more muni market reforms, as chairman, she will have wide responsibilities, Bentsen said.

“She will [also] have all of these other issues, [like] market structure and implementation of rules under Dodd-Frank,” Bentsen said.

Bond Dealers of America chief executive officer Mike Nicholas said his group plans to continue its “strong working relationship” with Walter.

BDA has mostly supported Walter’s push to improve issuers’ disclosures, he said.

Nicholas hopes to continue to work with Walter on issues such as the so-called Volcker Rule, which would restrict proprietary trading by banks.

BDA has urged regulators to exempt all muni bonds from the rule.

The Government Finance Officers Association, which has opposed the disclosure-related legislative recommendations in the SEC’s report, did not respond to requests for comment.

National Association of Bond Lawyers president Scott Lilienthal said the industry will benefit by having a chairman with such deep understanding of municipal finance.

The SEC, under Walter, will likely begin “to take steps to implement the ideas that were laid out” in the SEC’s muni report, he said.

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