Municipal issuers have failed to make enough progress in secondary market disclosure over the last few decades and it may be time to take regulatory action, according to the former Securities and Exchange Commission chair who spearheaded SEC muni scrutiny nearly a decade ago.
Elisse Walter told The Bond Buyer she has been hearing the same push for transparency since her start at the SEC, without the progress she hoped for when she first began writing and speaking about the issue in the mid-1990s. In that time the SEC has produced interpretive guidance and a municipal securities market report in to recommend greater transparency, both of which Walter played a part in.
“To me, it feels like I’m in the middle of hearing the same thing,” Walter said. “In the '90s, in 2011 to 2012, and now here we are in 2020 and again it’s the same issue.”
The 1994 interpretive guidance described the commission's views on issuers' disclosures of financial documents and the antifraud provisions of the federal securities laws in both the primary and secondary market. Its goal was to help market participants understand how the antifraud provisions of the securities laws would be applied and to push for more disclosure. Many in the market have been asking for an update to that guidance.
The 2012 report set out a plethora of recommended legislative and regulatory changes to increase transparency in the market. The SEC recommended seeking additional authority from Congress to improve disclosure, such as explicit power to enforce compliance with continuing disclosure agreements.
Walter was appointed commissioner by then-President George W. Bush and was sworn in in 2008. She was later designated chair by Bush's successor, President Barack Obama. Walter worked on the 1994 interpretive release, and led the review of the muni securities report in 2012.
She left the SEC in April 2013 after her term had expired, and is now a member of the Fixed Income Market Structure Advisory Committee, which gives recommendations to the SEC.
There have been increasing tensions between issuer officials and buy-side analysts on the need for more timely information in the secondary market, where issuers' audited financials often aren't available until several months after the close of their fiscal years.
Current SEC Chair Jay Clayton has mentioned several times that he wants to be sure investors aren't too reliant on stale disclosures.
Analysts say timeliness is important to help give investors relevant information and make educated decisions. Issuers say the muni market is diverse and are against a one-size-fits-all approach of standardizing disclosure timeliness.
At a recent FIMSAC meeting this month, the committee approved several preliminary recommendations connected to secondary market disclosure timeliness.
The SEC could decide to ask Congress to grant it the statutory authority to mandate secondary-market disclosure standards. A recommendation was approved to have the SEC explore ways to make disclosure deadlines for more annual information and audited financial statements more certain and predictable among others to enforce compliance with continuing disclosure agreements.
For the SEC to get that authority from Congress could be a long shot, but Walter said it should try.
“Legislation is always a difficult thing, but I think it would be good if the commission could try to do that and then using that authority, not close out the people in the marketplace, but work closely with people in the marketplace to say, how do we fix this?" Walter said.
Financial information that is late is not useful, unless there haven’t been significant changes in the financial situation of that issuer over time, Walter said. Investors are left with an inaccurate picture because they do not typically have access to interim financial data, she added.
In the 2012 report, the commission recommended receiving the authority to establish disclosure requirements and principles, timeframes and the frequency of dissemination of securities offerings and continuing disclosures. Back then, it said it would not seek to repeal or modify the Tower Amendment.
That provision of the securities laws, named after former Texas Sen. John Tower, prevents the SEC or Municipal Securities Rulemaking Board from requiring issuers to file documents with regulators prior to selling bonds.
There is a fear among issuers that giving the SEC statutory authority to enforce secondary-market disclosure violations beyond the use of the anti-fraud provisions would erode protections under the Tower Amendment.
Conceptually, Walter said she wants to repeal the Tower Amendment and has taken that stance publicly since a 2009 speech at Fordham University.
However, Walter does not recommend proposing the repeal right now.
“I said conceptually, I would agree with it, but I have never supported trying to make it happen,” Walter said. “It’s a very controversial idea and I think it’s something that would be very difficult to get done. I think we ought to concentrate on getting the basic tools that are needed to solve the problem.”
Muni market participants have long been in cooperative discussions of getting audited annual financial information out faster, among other disclosure objectives. Participants have released white papers over the years to discuss and set industry standards, but Walter says that is not enough.
“In the end, people in the marketplace seem to say, well we should talk about it and figure it out,” Walter said. “Well, it’s been a long time we’ve been saying that and we haven’t figured it out yet. I think sometimes you need someone to have the authority to say, this really has to be figured out.”
Some things have gotten better in the municipal market since the 2012 report, Walter said. Access to information has improved through the MSRB’s EMMA site. Recommendations made in the 2012 report to the MSRB have been followed through. Recommendations to consider amendments to SEC Rule 15c2-12 have also been acted upon since.
Changes to continuing disclosure timeliness just haven’t stuck and Walter said real progress has not been made.
“I do not want to minimize the fact that there are real practical difficulties for issuers and I don’t have all the answers on how to make this better,” Walter said. “But we’re operating in a system where no one has direct authority to make requirements.”
In the past six years, the median completion time of financial documents has stayed flat, according to a
Some issuers have risen to the occasion and turned in their annual audited financial documents more timely over the years, said Richard Ciccarone, Merritt’s president. Those include small cities, which some issuers have argued may not have all the resources needed to turn post audited financials in a timelier manner. Ciccarone would like to see issuers file audited annual financial statements within 120 days of the end of their reporting periods.
Country Club Hills, a suburb south of Chicago with just over 16,000 people, improved its audit times drastically since 2012. In 2012, its audit time was 924 days, in 2013 it was 722 days and by 2018 it finished its financials in 184 days, according to Ciccarone’s research.
However, some cities have gotten worse. Cupertino, California, filed its audited financial statements after 82 days in 2012. In 2018, its financial statements were filed in 365 days.
“I’m not trying to be down on any borrower,” Ciccarone said. “I’m trying to inspire the team to play a little better so that we can win the game.”
The SEC has used its enforcement powers to inspire some change in the municipal market, and has the authority to bring fraud charges against issuers who misleadingly claim to be in compliance with their CDAs when they are not.
In 2012, Walter said enforcement was not enough to bring change. She called it a powerful tool, but said by the time enforcement action is brought the problem is already created.
“Enforcement is very important in sending a message to the marketplace and being an incentive, but it certainly isn’t enough,” Walter told The Bond Buyer. “You want people to do it right the first time. Nobody is eager to accuse people of violating the law.”
Add-ons to Rule 15c2-12 are an option for the SEC, but they are reluctant to do so, Walter said.
15c2-12 is a list of financial events that issuers must agree to disclose on an ongoing basis before underwriters can agree to sell their bonds in a public offering. It is technically a requirement of the underwriters, because the SEC cannot dictate to issuers what they must do before a bond sale.
The SEC added two material events last year to the list of occurrences that issuers will have to agree to disclose within ten business days of their happening.
“It’s a convoluted regulatory scheme and the fact is, is that the commission has reluctantly each time gone back to the map and put additional requirements on the intermediary, but that’s not where the obligation should lie — it should lie on the issuer community,” Walter said.
Since 2012, there have been significant developments in technology as a way to help issuers communicate with their investors, said Emily Brock, director of the Government Finance Officers Association's federal liaison center. She cited the evolution of EMMA as an example.
There is still more to be done, Brock said, and issuers are involved in that conversation. Issuers are now realizing that the best way to display financial information is on their investor relations webpages, Brock said.
Brock added that the market needs to discuss the extent of the problem with late audited financial information.
As for giving the SEC more statutory authority, Brock calls that idea a “market disruptor.”
“If there is a mandate or additional statutory authority that is given to the SEC to have a heavy hand on what issuers can and cannot do, and the federal government telling state and local governments what to do, then issuers are going to likely try to find other sources of capital other than the municipal bond market,” Brock said. “That I don’t think is what they want to do here.”
Walter said more work lies ahead to get the state of muni disclosure to where she has for years wanting it to get.
“What I would consider to be the bigger recommendations in terms of increasing transparency, not much has happened," Walter said.
