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Securities Law

SEC Progress on Muni Measures Could Stall in 2013

DEC 26, 2012 1:55pm ET
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WASHINGTON — Political division in the leadership of the Securities and Exchange Commission could slow the agency's ability to advance a host of municipal market-related measures in 2013, say some market participants.

That's because the Dec. 14 departure of former chairman Mary Schapiro, a political independent, left the five-seat commission with four members: Republicans Troy Paredes and Daniel Gallagher, and Democrats Luis Aguilar and Elisse Walter, the new chairman.

It may be difficult for the SEC to reach the majority approval needed to enact new rules or rule changes, or to endorse legislation, some say.

"It may be that, unless things are agreed to by at least three of the four [commissioners] ... you won't get anything [done]," said one lobbyist familiar with the market who declined to be identified.

Michael Decker, co-head of municipal securities at the Securities Industry and Financial Markets Association, noted that the commissioners have disagreed about recent muni items, such as the Municipal Securities Rulemaking Board's interpretive guidance to Rule G-17 on fair dealing.

The guidance, which clarifies underwriters' fair-dealing obligations to issuers, passed in May on a three-to-two vote, with Republicans Paredes and Gallagher voting against it and releasing a dissenting statement.

"If the commission were two-to-two [then], the rule likely would not have been approved at all," Decker said.

"As long as it's a four member commission, I think you will see a greater degree of consensus building," he added.

The SEC has no shortage of muni-related items on its agenda.

Among them is the final definition of municipal advisor, which SEC officials have said will be issued early next year. The commission also is working with four other agencies to finalize the so-called Volcker Rule, which restricts banks from proprietary trading of securities, including munis issued by agencies and authorities. Officials have said that rule may be completed in the first quarter of 2013.

Progress is less certain on other items, such as the SEC's plan to update its 1994 interpretive guidance to Rule 15c2-12, which details issuers' disclosure obligations.

Then there's the SEC's July municipal market report, which recommended that the commission seek legislative authority to regulate the form, content and timing of issuers' financial disclosures.

The report, which was approved by all five commissioners, also suggested that the SEC and MSRB make rule changes to improve pre- and post-trade price transparency.

It recommended that dealers be required to seek "best execution" and report yield spreads, mark ups and markdowns. It also recommended that broker's brokers and alternative trading systems, which operate electronic trading platforms, be required to report best bids and offers.

MSRB Executive Director Lynnette Kelly said the board is working on best execution rule and fair pricing rules, but declined to say when they will be released in draft form.

Decker said it's possible the SEC will move forward with the 15c2-12 update and other regulatory recommendations in the report.

But he doubts Congress will grant the SEC authority over issuers next year.

"Moving legislation through Congress takes a much longer time than moving rules through regulatory agencies," he said. "We probably won't see that in the near term."

Mike Nicholas, Chief Executive Officer at Bond Dealers of America, said leadership at the SEC has become increasingly complicated in recent weeks. Not only has Schapiro left, but Meredith Cross, director of the SEC's division of corporate finance, is leaving at the end of December.

"It doesn't seem logical that when you make things more complicated you move with more efficiency and speed," Nicholas said.

Others say the SEC may accomplish more in 2013 than some expect.

Paul Maco, an attorney at Bracewell & Giuliani LLP and former head of the SEC's municipal securities office, said bipartisan support for the muni report demonstrates commissioners can reach consensus.

"If the same common ground achieved in that report extends to the specific rulemaking process, then they may be able to accomplish more than some people believe," he said.

Maco agreed that the legislative recommendations could prove a challenge.

"The critical element — having a congressional champion — is a piece of the puzzle that remains to be filled," he said.

Municipal Advisors
Of all of the muni items on the SEC's agenda, market participants are most confident that the final definition of municipal advisor will be finalized early next year, as SEC officials have said.

A source on Capitol Hill familiar with muni issues said top regulators at the SEC face a "tremendous amount of political pressure, and professional pressure, to get the [MA] rules right."

That's because the SEC's original definition, released in 2010, was widely criticized as being overly-broad and needlessly encompassing staffers at banks and non-paid members of municipality's boards.

In response, Rep. Robert Dold, R.-Ill, introduced a bill that defined advisors as those engaged for compensation to provide advice. It exempted underwriters, bankers and swap dealers, as well as those who provide related advice.

The bill, which some insiders called a "message" designed to encourage the SEC to act, was approved by the House in September. A companion bill has been introduced in the Senate.

SIFMA and BDA hope the SEC's definition mirrors Dold's, but some non-dealer affiliated MAs, public advocacy organizations and labor groups said the bill erodes protections afforded to state and local governments by the Dodd-Frank Act.

Once the SEC releases the definition, the MSRB will likely quickly follow up with proposed MA rules and rule changes, market participants said.

They expect the rules will be similar to those the MSRB filed with the SEC in 2011, then withdrew the same year, citing the need for the SEC to finalize the definition.

"We expect then the MSRB to move swiftly on the municipal advisor rulemaking suite that it had withdrawn pending the final [definition]," said David Cohen, SIFMA managing director.

"The MSRB will probably turn around quickly and release these rules, said Nathan Howard, an attorney with Kodner Watkins & Kloecker LLC who works with advisors. "In terms of regulation, next year is going to be a big year.

Kelly declined to say fast the board might act, but said previously-drafted rules could need "extensive changes," depending on the definition.

The rules will also need to be reviewed by different board members, she said, noting that only one-third of current members were involved in drafting the initial rules.

Kelly added that all the board's rulemaking next year will be accompanied by a close examination of costs and benefits and an examination of "alternatives to rulemaking."

"You can very easily write a rule, but you might be better providing targeted education, outreach events, issue best practices and continuing education requirements," Kelly said. The board could also work more closely with the Financial Industry Regulatory Authority on enforcement matters, she said.

MA rules are only part of the MSRB's agenda for its 2013 fiscal year, which started in October.

The group, which released its entire rule book for public comment earlier this month, will review the comments next year and decide whether to make changes.

The board will also re-engineer its Real-time Transactions Reporting System and finish integrating data from the New Issue Information Dissemination Services, or NIIDS, into EMMA, Kelly said. The integration is aimed at easing underwriters' reporting requirements by letting them report only to NIIDS, rather than to both NIIDS and the EMMA system.

Another MSRB priority will be to promote better disclosures, potentially by helping ensure issuers have access to, and understand, disclosure best-practice documents written by muni market groups, Kelly said.

Those efforts could dovetail with a bank loan disclosure guide being developed by a coalition of groups led by the National Federation of Municipal Analysts.

A draft of the document, which follows a pension disclosure guide issued by groups earlier this year, will likely be released in the first quarter of the year, said NFMA executive director Lisa Good.

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