WASHINGTON — The Securities and Exchange Commission would impinge on the sovereignty of state and local governments if granted the disclosure authority requested in its July 31 report on the municipal market, the Government Finance Officers Association is warning.
In a public policy statement released Nov. 1, the Chicago-based group detailed its opposition to many disclosure-related recommendations in the SEC’s report, saying efforts by the commission to “impose federally dictated” standards over the content and timing of issuers’ disclosures would be regulatory overreach.
“A lot of this does go to the sovereign rights of the states,” Jeffrey Esser, GFOA executive director and chief executive officer, said of the SEC’s report. “[The SEC] would be interfering in the independent setting of financial and reporting standards.”
GFOA plans to send the statement to the SEC and form a coalition with state and local organizations to oppose the commission’s recommendations, he said.
“The report should not stay out there unchallenged without someone speaking out as to why some of what [the SEC] recommended just doesn’t make sense,” Esser said.
In its July 31 report, the SEC made a number of requests, including for congressional authority to set the form, content and timing standards of state and local governments’ financial filings. The SEC also requested authority to require governments follow reporting standards like the Governmental Accounting Standards Board’s “generally accepted accounting principles,” known as GAAP.
If granted, such authority could replace the current regulatory scheme under which the SEC oversees disclosures indirectly through regulations on muni bond dealers. The SEC prohibits dealers from underwriting bonds unless they are sure issuers have entered into written contracts to disclose annual financial and operating information and material events as they occur.
In its policy statement, the GFOA said states should retain authority to set financial reporting standards for themselves and their local governments.
“Any attempt by the SEC to replace state authority, directly or indirectly, will be vigorously opposed,” the group wrote. It said “artificial deadlines” set by federal regulators would force issuers to rush to finish disclosures, resulting in unreliable information.
GFOA noted that some local governments, particularly smaller municipalities, follow accounting standards other than GAAP, such as the “Other Comprehensive Basis of Accounting,” which is recognized by the American Institute of Certified Public Accountants.
Forcing GAAP on all state and local governments would create financial burdens for governments that “can afford it the least and create significant disruption to their government’s accounting practices,” the GFOA said.
Esser said the SEC “fundamentally” does not understand state and local governments and seems not to recognize that they make much more financial information available to investors than private-sector firms.
For instance, governments typically post budgets on their websites and send monthly financial reports to city councils and other boards, he said. Also, governments’ comprehensive annual financial reports include ten years of financial trend data.
The SEC could make better use of its time and resources by focusing oversight on areas where it already has authority, rather than seeking additional authority “where regulation isn’t needed,” Esser said.
GFOA doesn’t oppose all of the recommendations in the SEC’s report. The group said it supports the SEC’s call to protect issuers from legal liabilities that might arise from projections and forward-looking statements in financial disclosures.
The group also supports the SEC’s request for authority to impose corporate-style financial reporting requirements on corporate “conduit” borrowers of tax-exempt bonds.