WASHINGTON — The coming year could herald the most significant regulatory changes in the municipal securities market in more than 35 years.
At the very least, market participants say, 2012 should bring much-needed regulatory clarity.
As regulators fulfill their Dodd-Frank mandates to oversee municipal advisors, including the Securities and Exchange Commission’s permanent muni advisor registration rule and definition, Congress is expected to weigh a potentially expanded role for the SEC, including direct authority over the timing and content of issuers’ primary and secondary market disclosure.
The new year will also bring a high-profile federal bid-rigging trial, stemming from the 2009 indictment of CDR, formerly Chambers, Dunhill, Rubin & Co., and several of its former officers. That proceeding could feature testimony about a broad swath of muni market deals and participants, including some who were caught rigging bids on federal wiretaps.
“It’s a big year,” said Paul Maco, a partner at Vinson & Elkins LLP in Washington.
On the regulatory front, the SEC is expected to finalize its long-awaited permanent muni advisor registration scheme and definition next year, paving the way for additional rulemaking from the Municipal Securities Rulemaking Board.
The board, which pulled five proposed muni advisor rules in September, pending release of the SEC’s final definition, is slated to complete a muni advisor professional qualifications exam by the fall.
“I think it’s really where the regulation becomes reality,” said Colette Irwin-Knott, a partner at H.J. Umbaugh & Associates LLP in Indianapolis and the president of the National Association of Independent Public Finance Advisors.
Until recently, most market participants had expected the SEC to finalize the muni advisor rule by Dec. 31, when its interim rule expires.
But on Dec. 21, the SEC announced a nine-month extension of its interim registration rule, to Sept. 30, 2012, further delaying the MSRB’s rules as well.
Separately, market participants await a slew of muni-related reports, also scheduled for release in the coming year.
In January, the Government Accountability Office must issue a Dodd-Frank-mandated study of muni trading that makes recommendations for improving transparency, efficiency, fairness, and liquidity.
In a second study, due on Dodd-Frank’s two-year anniversary in July, the GAO is to compare muni and corporate disclosure and evaluate the costs and benefits of requiring issuers to improve disclosure. The GAO must also make a recommendation on whether to repeal the Tower Amendment, which prohibits the SEC and the MSRB from requiring issuers to file pre-sale disclosure documents.
Also in 2012, the SEC is expected to unveil a muni market staff report, spearheaded by SEC Commissioner Elisse Walter and underway since 2010.
That report, which could be released with a long-anticipated update of the SEC’s 1994 interpretive release on issuers’ continuing disclosure obligations, will include recommendations for legislative changes to increase the SEC’s disclosure authority.
Some market participants wonder if the SEC’s search for a new head for its municipal securities office and the delay in issuing its final muni advisor registration rule and definition mean the staff report and interpretative release would not be issued until later in 2012.
The MSRB is expected to weigh in as well, with a muni market structure and trading study prepared by Erik Sirri, former director of the SEC’s trading and markets division.
“There’s a lot of anecdotal assumptions in our market,” said Lynnette Hotchkiss, the MSRB’s executive director. “But you really want to have hard data to inform better discussions, better decisions, [and] cost-benefit analysis.”
Collectively, these reports could bolster the SEC’s efforts in Congress to enlarge its disclosure authority, market participants said.
At a minimum, congressional muni hearings in 2012 could lay the foundation for such reform, even if Congress does not take up actual legislation until the following year, market participants said.
State and local governments predictably chafe at the prospect of greater SEC oversight. They maintain the key to disclosure improvements is better training, especially of small and infrequent issuers, and voluntary compliance, particularly given recent improvements to the MSRB’s EMMA system.
“The fact is, we do have a disclosure process in place that is pretty good,” said Eric Johansen, Portland, Ore.’s treasurer and the chairman of the Government Finance Officers Association’s debt management committee. “I’m not at the point of saying there needs to be a change.”
Some market participants noted that 2012 is a presidential election year, making it unlikely an already-polarized Congress would boost the authority of the SEC, which is in the forefront implementing Dodd-Frank, a law many Republicans opposed.
“It’s hard for me to see legislation getting enacted,” said William Daly, senior vice president of government relations for Bond Dealers of America. Still, one issuer group vowed to resist. “We don’t see a problem in the municipal bond market that needs federal intervention,” said Lars Etzkorn, program director of the center for federal relations at the National League of Cities. “And that is the message we will carry.”
The question, of course, is whether issuer opposition will blunt any push for reform, especially after 2010 saw bankruptcy filings by Harrisburg, Pa., as well as Jefferson County, Ala., which is in the congressional district of Rep. Spencer Bachus, a Republican who chairs the House Financial Services Committee.
In a statement at the SEC’s Birmingham, Ala., field hearing in July, Bachus said Jefferson County reflected “an extreme case in municipal finance gone wrong.” He also said he was ready to work with the commission to ensure “necessary reforms” for the muni market.
The Financial Services Committee could hold muni hearings as early as the first quarter of 2012, depending on when the SEC releases its staff report, according to market participants and lawmakers’ staff. A spokesperson for Bachus did not respond to a request for comment.
One potential complication is the retirement of Rep. Barney Frank, D-Mass., who will not seek re-election after his current term expires. Frank, the namesake of the financial reform law, is the ranking Democrat on House Financial Services, as well as a muni investor. He has served as a muni market champion, an issuer group said, and his departure will leave a void, forcing state and local governments to step up efforts to educate lawmakers.
“We need to do a better job, I think,” Etzkorn said.
But some issuers sound a note of resignation, particularly about the SEC.
“They prod and prod and say they’ll do something,” said Frank Hoadley, Wisconsin’s capital finance director. “Maybe they will and maybe they won’t. Nevertheless, things change.”
Another issuer, who testified at the Birmingham field hearing, expressed skepticism about whether the SEC had listened to issuers’ concerns.
“I’m hoping that wasn’t just for show,” said Ben Watkins, Florida’s director of bond finance. “Hopefully, they heard from industry participants and practitioners and the [staff] report will be reflective of that. But I’m not optimistic on that front.”