WASHINGTON – Congress should give the Securities and Exchange Commission direct regulatory authority over issuers to improve disclosure in the municipal market, an analyst group told lawmakers and regulators.
The National Federation of Municipal Analysts made this and other disclosure recommendations in a
The letter urged them to focus on the SEC's 2012 Report on the Municipal Securities Market, which identified problems and possible solutions in a number of areas of the market, to make its case for direct regulation of issuers.
The majority of its recommendations "fall within the current municipal bond market regulatory structure," NFMA said. But increased regulatory authority for the SEC should be considered because the other solutions "may not be sufficient to provide the type of oversight that is necessary to ensure adequate transparency and fairness for municipal bond market participants," the group said.
Lisa Washburn, NFMA chair and the letter's author, said that three legislative proposals from the SEC 2012 report "warrant serious consideration," including: authorizing the SEC to require issuers to prepare primary and continuing disclosure during the term of securities; permitting the SEC to require that financial statements be audited; and allowing for a mechanism to enforce issuer compliance with continuing disclosure agreements (CDAs).
Under current law, the SEC and MSRB cannot directly or indirectly regulate issuers because of provisions in the Tower Amendment, which was added in 1975 to the Securities Exchange Act of 1934.
"We believe that the time has come for the [SEC] to implement the recommendations for improved disclosure made in [its 2012 report] and to seek broader legislative authority that will strengthen the SEC's oversight of the municipal securities market," William Oliver, NFMA's industry and media liaison, said in a press release.
Emily Brock, director of the Government Finance Officers Association's federal liaison center, said that while legislative authority is on NFMA's "wish list," it is not on GFOA's.
GFOA has done "a lot of hard work to inform the issuer community through best practices" since the SEC released the 2012 report, she said, adding that all market groups share a desire for timely, accurate, and meaningful data.
Washburn said in the letter that the SEC should also focus on improving current tools and interpretive guidance to further bolster disclosure. NFMA is concerned about the content and exclusion of material information in primary offering documents and the quality and timeliness of secondary market disclosures, she said. The group also believes regulatory and industry efforts to address disclosure problems have lagged.
"The NFMA believes that timely, comprehensive and accessible disclosure is critical to ensuring a fair and functioning municipal market," she said. "Lack of such disclosure can impair accurate pricing of a security and its liquidity in the secondary market."
NFMA is asking the SEC to review SEC Rule 15c2-12 on disclosure with a goal of establishing more standardization in terms of the form, content, and timing of the information the rule requires to be disclosed. Washburn said the SEC could consider using language to: have issuers' CDAs include statements about their policies and procedures for complying with them; encourage issuers' dissemination of interim financial information on a timely basis; and have issuers' disclosures reflect best practices from groups like NFMA, GFOA, and the National Association of Bond Lawyers.
The SEC should also expand the list of material events under Rule 15c2-12 as part of an ongoing goal to keep the list evolving over time and emphasizing that it is not an exhaustive list, Washburn said. NFMA is suggesting that the SEC add other long-term debt obligations like bank loans and direct purchases to the list as well as any occurrence that is clearly material to an investor's ability to assess credit quality for a security. Issuers should be required to give notice when they have resolved past reported material events, NFMA said.
The SEC could also work to provide more interpretive guidance to the muni market, something it has not done since 1994, Washburn added.
"There … seems to be a misconception that providing information required under 15c2-12 is the 'gold standard' or 'ceiling' and therefore, there is reluctance by some municipal issuers, underwriters, counsel and/or financial advisors to provide additional information, regardless of its significance," she wrote.
NFMA also said that recent situations of issuer distress have shown that more detailed information on security structure is needed. Bond security disclosure should include things like specific revenue pledges and tax raising abilities and process, as well as any limitations on raising incremental or new revenues, and whether a statutory lien is present, Washburn wrote.
Also issuers should be restricted from giving different market players different levels of information. They should be giving the same information to investors as they give to rating agencies, something that NFMA said does not often happen in the market, she added.
