The National Association of Bond Lawyers is warning the Securities and Exchange Commission that applying its asset-backed securities rules to municipal bonds, as proposed, would violate existing law and run contrary to congressional intent.
In a letter signed by NABL president John McNally and accompanying documents sent to the SEC Friday, the bond lawyers’ group said also that the application of the proposed rules to munis is “unnecessary and inappropriate.”
Meanwhile, the Investment Company Institute, which has long sought improvements for muni disclosure, told the SEC in a four-page letter on Monday that while it generally supports the proposals, munis should be exempted from them.
“We are concerned that a piecemeal approach to municipal securities disclosure would have the unintended effect of creating confusion for investors and issuers alike because different classes of municipal securities would be subject to different disclosure requirements,” said Karrie McMillan, the general counsel of ICI, whose members manage assets totaling over $12.05 trillion and serve more than 90 million shareholders.
Federated Investors Inc., one of the largest investment management firms in the U.S. with $341.3 billion in assets under management as of Sept. 30, sent a two-page letter to the SEC Monday urging it to exclude municipal tender-option bonds from the proposed ABS rules.
“Subjecting TOBs to additional requirements is likely to curtail the issuance of TOBs and exacerbate the current shortage of eligible securities for tax-exempt money market funds,” said Mary Jo Ochson, Federated’s senior vice president and chief investment officer for short-term municipal funds.
TOB program structures are vetted by lawyers for both the buy side and the sell side before issuance, she pointed out. Typically, they are tailored to be eligible for money market funds and, as a result, are highly regulated and transparent.
The SEC’s proposed rules would implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act designed to provide more transparency in the ABS market and avoid problems that led to the financial crisis in 2008, when originators of subprime loans had no incentives to make sure the loans performed well and walked away from them when they did not.
The two sets of rules, proposed Oct. 4 and Oct. 13, would define ABS broadly so that it covers a wide range of munis, including housing bonds, student loan bonds, pooled financings, and even leases and installment sales.
One set of rules would require issuers to disclose in forms submitted to the SEC the extent to which there were nonconforming loans in their loan portfolios backing ABS and whether they were removed. Another set would require issuers, or third parties they hire, to review the assets or loans underlying the securities and disclose the findings in forms filed with the SEC.
But NABL told the SEC that because both sets of proposed rules would require muni issuers to disclose information in forms filed with it before the ABS were offered, the rules would violate the Tower Amendment, which was added in 1975 to the Securities Exchange Act of 1934. The amendment prohibits the SEC from requiring muni issues to file documents with it before selling bonds.
The bond lawyers’ group said also that Congress did not intend for the rules to cover munis because the Dodd-Frank law states the rules “shall … provide for … a total or partial exemption” for munis.
In addition, the Dodd-Frank law directs the Government Accountability Office to make recommendations on muni bond disclosure. “Congress wanted the benefit of careful study” before considering any appeal of the Tower Amendment, NABL said.
Further, the proposed rules would fly in the face of the current muni disclosure system, which has been blessed by the SEC, according to the bond lawyers.
“Municipal investors look to the Electronic Municipal Market Access system for disclosure by municipal issuers and the SEC has encouraged the development and expansion of EMMA,” they told the SEC. The rules would be “unnecessarily duplicative and complicated for issuers and confusing to municipal investors.”
Finally, munis are not ABS and do not pose the same risks, NABL said.
“The municipal securities markets did not experience the failures or defaults and municipal investors have not experienced the losses that led to the remediation provisions” of the securities laws, it said. “To the extent they rise at all, obligations to repurchase or replace an underlying asset for most municipal issuers stem from guaranties or other federal requirements, rather than a failure to comply with underwriting standards, which is what the relevant provisions of the act seek to address.”