SEC sees work ahead on muni disclosure

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WASHINGTON - Securities and Exchange Commission Chairman Jay Clayton indicated Thursday that the SEC may be interested in taking additional regulatory action to improve municipal market disclosure.

Clayton said in prepared remarks that he has asked the commission's Office of Municipal Securities to work with the Municipal Securities Rulemaking Board to improve transparency and increase timeliness of issuer financial information.

Clayton's remarks were prepared for a one-day conference at the SEC's headquarters, though Clayton participated remotely from the commission's New York office. The conference, “The Road Ahead: Municipal Securities Disclosure in an Evolving Market,” was announced earlier this year and was a suggestion from the SEC's 2012 Report on the Municipal Securities Market. Clayton's and other commissioners' remarks indicated that the SEC may be looking to take additional steps to improve disclosure in the muni market.

"To be clear: I believe that there are potential steps that the SEC and the MSRB can take—that would be wholly consistent with the words and spirit of the Tower Amendment—to improve transparency around the age and type of financial information," Clayton said in his remarks.

Clayton added that he asked staff to work with the MSRB to see if its EMMA system — an online source for municipal securities data and disclosure documents — could yield greater transparency regarding issuer financial information.

“My broad view is that providing greater clarity regarding existing municipal issuer financial disclosure practices will provide investors and the market with better access to valuable information,” Clayton concluded. “This transparency and consequent adjustments in investor preferences may also incentivize some issuers to make financial disclosures on a more timely and consistent basis.”

MSRB Chair Gary Hall responded in a statement to The Bond Buyer.

“It is always important to us, of course, to hear the priorities of the SEC chairman for the municipal market,” said Hall. “We share his interest in improved municipal disclosure. In fact, the board will be discussing these issues at our meeting next month. We look forward to continuing to work with the SEC along with many interested market participants on these issues.”

Commissioners answered questions from Rebecca Olsen, Director of the Office of Municipal Securities, during the final session of the day. Commissioners stressed their views were their own, and were mostly in agreement Thursday.

“In this area, I think that we’re much more likely to see things from a unified perspective because obviously disclosure is the core of what we at the SEC do,” Commissioner Hester Peirce said.

Peirce said disclosure is important in both the primary and secondary market because the muni market is retail investor heavy.

“It makes it more important than ever because it’s more difficult to push for disclosure if you’re a retail investor,” she said. “I think it’s really important for us to get information to investors, even if they might not necessarily themselves look at it.”

Commissioner Robert Jackson said through his experience in corporate practice, he found that when people are forced to explain to provide explanantions to investors , it leads to beneficial conversations. Corporate bond issuers are required to provide disclosure information to the SEC, but the Tower Amendment prohibits the SEC and MSRB from requiring issuers to file muni securities documents before bonds are sold.

Issuers in the past have shown concern with costs and burdens associated with disclosure. Rules furnished by the SEC haven’t been completely clear on the definition of"materiality," leading to confusion among issuers. The SEC has hesitated to provide firm guidance on what types of information are material to investors, but the Supreme Court ruled in TSC Industries, Inc. v. Northway, Inc. that a fact is material if there is a substantial likelihood that a reasonable investor would consider it important.

Peirce said investors need material information from issuers and added she welcomes commentsso the commission can work on building flexibility into its rules.

“Ultimately, we do have to think about the investor too, and what the investor needs so I think we’re always trying to get that balance right,” Peirce said.

When asked if muni issuers could benefit from more guidance, Peirce said she tries to be conscious when making rules and said it’s challenging given the diversity of issuers.

“We do need to be careful when we are doing rulemaking in this space, not to send messages to people that might confuse them with what’s material,” Peirce said. “We don’t want to suggest that there’s a lower bar, lower standard for materiality than there actually is.”

Commissioner Elad Roisman said the market had done “a pretty good job” in determining materiality and favors a flexible definition because each issuer may have varying needs.

He also echoed Peirce in being open to improvement.

Jackson said the commission has a role in providing standardized, timely disclosure and that it has a crucial benefit for issuers, though it may be hard for them to see. However, he said he isnot against flexibility, but added timeliness was key.

Jackson said the market can figure out what is important to investors, and added he was less worried about issuers and investors being confused. The commission can be a guide and doesn’t necessarily need to provide an answer, he said.

Cheryl Allen, president of Texas-based muni advisory firm PFG Finance Group LLC., said she found the conference helpful.

“It’s informative, I think from my perspective it’s good to see different ideas that various people have,” she said. “It’s just important to me to know where we’re headed.”

Allen added before the commissioners spoke, that she wanted more clarity from them.

Earlier in the day, panelists discussed the future of disclosure and where it could be headed.

Dee Wisor, a partner at law firm Butler Snow LLP and current president of the National Association of Bond Lawyers, said it would help issuers to not have to repeat information in both the primary and secondary disclosure documents. He added that issuers are worried about missing information that could be deemed material.

Amy Johonnett, a research analyst with Fidelity Investments, said it was vital for her to receive disclosure documents in both primary and secondary markets. She also said she was very thankful for EMMA and urged issuers if they were questioning disclosing material, to disclose it anyway.

An audience member asked Johonnett about her definition of materiality.

“If it’s something that you guys are contemplating, and wondering whether or not it’s material, then disclose it,” she said.

The audience member warned Johonnett to be careful what she wished for.

“You’re going to see these things like snowflakes, and I think you’re going to get buried in these really meaningless disclosures,” he said.

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