PHILADELPHIA — Municipal issuers need to be prepared to fight against Securities and Exchange Commission efforts to directly regulate them, members of the Government Finance Officers Associations' Committee on Governmental Debt Management said Saturday.
The issuer officials who met for several hours prior to the conference's formal opening Sunday spent considerable time discussing the SEC's regulatory and enforcement agenda in the wake of the Municipalities Continuing Disclosure Cooperation initiative last year. That initiative encouraged issuers and dealers to voluntarily report to the SEC anytime in the last five years in which they sold or underwrote bonds and the offering documents did not identify recent failures to comply with issuers' continuing disclosure agreements as required by the SEC's rule 15c2-12.
Debt committee chair Ben Watkins, who is the director of Florida's division of bond finance, has been a highly vocal critic of the SEC's approach and has repeatedly said that issuers have wasted time and money combing through past bond documents in search of deals they might want to report under the MCDC. The initiative expired late last year, on Sept. 10 for underwriters and Dec. 1 for issuers. The market is awaiting SEC settlements stemming from the self-reports, but members of the committee are concerned that the commission could be using the info gleaned from MCDC as ammunition to push for repeal of the Tower Amendment.
The Tower Amendment, which was added to the Securities Exchange Act of 1934 in the mid-1970s, prohibits the SEC and Municipal Securities Rulemaking Board from requiring issuers to file documents with them before selling munis. The SEC's 2012 Report on the Municipal Securities Market stopped short of recommending a repeal of Tower, but did advocate some legislative changes that would allow the SEC to more closely regulate the content of issuer disclosures, such as authorizing the commission to establish the form and content of financial statements for municipal issuers.
A Washington-based lobbyist warned the debt committee that the MCDC could potentially serve as evidence of widespread fraud in the muni market that the SEC could use as ammunition if it decided to press for repeal of Tower. Nearly all the committee members said they did reviews of their past offerings when the MCDC was announced last year, and largely discovered disclosure failures they thought might not be important to investors and therefore "immaterial" from a legal standpoint. Unreported downgrades of bond insurers and event filings late by a few days were common findings, committee members said.
"We're going to need to play defense on the legislative side so that the SEC doesn't repeal Tower," Watkins said.
After some discussion about the progress of MSRB municipal advisor rulemaking, disclosure and the legacy of the MCDC continued to occupy the committee when National Federation of Municipal Analysts industry and media liaison Bill Oliver addressed the group. Oliver discussed recent NFMA white papers on conflicts of interest and bank loan disclosure. Municipal bank loans are a growing and relatively opaque segment of the market that has analysts concerned. Issuers are not required to disclose the terms of their loans, but these debts are often payable from the same revenue stream as outstanding bonds and could potentially impact the credit quality of those securities.
Oliver told the committee that issuers should either give investors the bank loan documents with appropriate redactions, or at the very least summarize the documents. One committee member told Oliver that there does not appear to be much market benefit for issuers who go above and beyond in disclosure: their bonds price the same way as if they had stuck to the minimum requirement. But Oliver said the industry should strive for best practices because failing to do so just opens it up even more to MCDC-style SEC activity.
"That's really why we should be doing the right thing," he said.
Watkins said bank loans in the muni market have been much more prevalent and lasting a trend than he thought they would be, and said issuers should understand how their loan agreements could affect their outstanding bonds. Several members of the committee said that banks have aggressively pitched loans to muni issuers, and that smaller, less sophisticated issuers often may not understand the debt implications of those loans.
The committee also discussed the recent news that Moody's Investors Service would begin beaming its ratings live to the MSRB's EMMA website June 1. The MSRB began providing ratings from Fitch Ratings and Standard & Poor's on EMMA in 2011, and Kroll Bond Rating Agency followed suit in September last year. Moody's had been the lone hold-out, leading to much issuer frustration and a public chiding from GFOA president and Boulder, Colo. chief financial officer Robert Eichem earlier this year.
Rule 15c2-12 includes rating changes as material events that need to be included in continuing disclosure agreements in order for dealers to underwrite bonds, but issuers and bond lawyers are beginning to question whether that is still necessary now that EMMA will be providing the ratings live for every agency. Watkins said that GFOA is considering seeking a no-action letter from the SEC that would say the enforcement division would consider issuers in compliance with their disclosure agreements even if they did not report rating changes, as long as the current ratings for the bonds appear on EMMA.
