WASHINGTON – Municipal issuers are blasting the National Federation of Municipal Analysts' suggestion that Congress give the Securities and Exchange Commission new authority to regulate issuers' disclosures, calling it overly burdensome and ineffective.
NFMA made the recommendation as part of a broader letter on improving disclosure sent to leaders of the finance, banking, and tax committees in Congress, as well as the SEC and the Municipal Securities Rulemaking Board.
Ben Watkins, director of bond finance for Florida, called the NFMA's letter "very extreme."
"It's like an analyst's wish list [that] effectively results in the wholesale regulation of the muni market," Watkins said. He added that the Government Finance Officers Association plans to write a response in the next few weeks.
One market participant who asked not to be named said NFMA was both engaging in "classic rent-seeking" behavior, trying to get more without having to do anything themselves, and starting "a war between analysts and issuers."
Several issuers involved with GFOA said they were not notified that NFMA would be filing the letter or making the suggestions despite close collaboration between the two groups on disclosure issues in the past.
NFMA's letter was centered on recommendations made in the SEC's 2012 Report on the Municipal Securities Market, which identified problems and possible solutions in a number of areas of the market. The majority of the letter focused on possible steps the SEC could take in regard to two issues: amendments to its Rule 15c2-12 on disclosure, which haven't been made since 2010, and interpretive guidance on disclosure, which hasn't been provided since 1994. Both ideas have garnered support in the past.
"We have worked independently and collaboratively with other industry groups to facilitate better disclosure under the current system," said Lisa Washburn, NFMA's chair. "But it seems, at least to us, that without enhancements to Rule 15c2-12 and more robust guidance from the SEC that municipal investors are often left without the information necessary to evaluate an issuer's current fiscal condition."
The more controversial section of the letter suggests that three legislative proposals from the SEC 2012 report "warrant serious consideration." The proposals include: authorizing the SEC to require issuers to prepare primary and continuing disclosure during the term of securities; permitting the SEC to require that issuer financial statements be audited; and allowing for a mechanism to enforce issuer compliance with continuing disclosure agreements (CDAs).
Bill Oliver, NFMA's industry and media liaison, said the legislative proposals were complementary to the aim of getting the SEC to amend 15c2-12 and update interpretive guidance, which he added "are of far greater significance to the NFMA than SEC oversight."
"We're not calling for a repeal of the Tower Amendment in this letter," Oliver said. The Tower Amendment was added in 1975 to the Securities Exchange Act of 1934 and prevents the SEC and MSRB from directly or indirectly requiring issuers to file municipal securities documents with them before the securities are sold.
Issuers, who said they agree with NFMA that disclosure can and should be improved in the market, bristled at the idea that NFMA may want to get there through SEC regulation of issuers.
"I can't think of anything worse for our market," Watkins said of what he added would be another piece of the SEC's already "dysfunctional" regulation that would further burden issuers if the proposal became a reality.
Timothy Firestine, chief administrative officer for Montgomery County, Md., said he is not sure why NFMA thinks regulating issuers "somehow is going to be the answer" to disclosure problems.
Frank Shafroth, director of the Center for State and Local Leadership at George Mason University, said he finds the SEC "to be virtually unaccountable" and its "ability to relate to state and local leaders to be almost non-existent."
Jonas Biery, vice chair of GFOA's debt committee, said he is "perplexed by [NFMA's] approach that is non-collaborative and the [letter's] perspective that disrespects the realities of the public domain and the public environment." He pointed to the ongoing education of the issuer community through things like GFOA best practices as a better way to improve disclosure than complex SEC regulation.
David Erdman, capital finance director for Wisconsin, agreed, saying there were a number of good things in the NFMA letter but that the proposal for SEC oversight was "alarming."
Watkins echoed other issuers in another critique of the letter, saying a lot of the information that NFMA was asking for can already be found with just a little more work.
"Analysts have never seen a piece of information they didn't want or need," he said. "There's an extraordinary amount of information that is available in the public domain that they fail to avail themselves of because they want to be spoon-fed, is what I read."
Biery, business operations manager for the Portland Bureau of Environmental Services, said, "It's a little frustrating to not recognize that investors, analysts, [and] citizens already have access to a wealth of information that they just need to go out and seek."
Issuers also said it is important to understand that more required disclosure leads to more costs that issuers have to bear and could potentially have negative impacts on overall issuance and thus the country's infrastructure.
"At a time when everyone is talking about the need for more infrastructure and investment, let's not create a regulatory regime that somehow discourages our issuers from wanting to create that infrastructure," Firestine said.
Shafroth recommended that one of the things NFMA or the SEC should do is to find out what the cost of the increased disclosure will be for issuers on a proportional basis to help avoid the risk that requirements would be put in place that would discourage issuance.
"If you tell someone, 'You have to do something,' it seems to me you bear a responsibility to tell them … how they are going to do it," Shafroth said.
