CHARLESTON — Congress should give the Securities and Exchange Commission the authority to set baseline standards for issuers’ primary and secondary market municipal securities disclosures, the SEC commissioner charged with conducting a review of the muni market said Tuesday.
In a keynote address here kicking off a three-day conference of the National Federation of Municipal Analysts, SEC commissioner Elisse Walter said that in order to enhance investor protection in the market additional authority from Congress would be helpful.
“Of course, it’s far to early to tell if this will go forward, but I am extremely pleased that a number of key members of Congress have indicated an interest in municipal securities market reform, and, in particular, in more timely and consistent financial disclosures by municipal securities issuers,” Walter said, noting that a House Ways and Means Committee panel has scheduled a hearing on pension transparency for Thursday.
Asked by a bond lawyer after her speech what the SEC specifically wants from Congress, Walter said the commission should not seek a repeal of the Tower Amendment, which prohibits the SEC and the Municipal Securities Rulemaking Board from requiring issuers to file disclosure documents with them before selling municipal securities.
“We don’t need Tower repealed,” said Walter, who advocated the amendment’s repeal in a 2009 speech at Fordham Law School but has since changed her mind.
Rather, the SEC should seek the authority to set some “basic disclosure standards” in the primary and secondary markets, to provide a “baseline,” she said.
The agency would exercise such authority with discretion, Walter added, recognizing differences among the size and sophistication of issuers.
The idea would be for the standards to provide investors some assurance that they could scrutinize and compare every disclosure in roughly the same way, so they could draw comparisons among different documents, she said.
In an interview after the speech, Walter said the SEC continues to struggle with its lack of direct authority, under the federal securities laws, over disclosure by issuers. Under current law, the SEC regulates issuers indirectly, through its jurisdiction over underwriters and through the antifraud provisions of the federal securities laws, which ban false or misleading statements of material fact and omissions of material facts in documents related to the sale of securities.
“If legislation were seriously considered, it could be put in context,” Walter said. “I don’t think we’re looking to write a telephone book.”
Walter has been overseeing a review of the municipal market, which is expected to result in a report that could call for legislation, rulemaking and changes in industry practices. She has been seeking comments from market participants and others at public hearings and, in the wake of budget cuts, through the SEC’s website.
During her remarks, she encouraged NFMA members to e-mail or call her with their concerns. Analysts at the conference, including some who questioned Walter from the audience, embraced her “layered approach” to improving disclosure, which she explained in her remarks as collaboration among lawmakers, regulators and market participants.
“Her comments in general show a willingness to work with other industry groups to improve disclosure,” NFMA chairman Gregory Clark said in an interview after Walter’s speech. “It’s encouraging to see the SEC take that kind of approach.”
At a muni roundtable discussion later in the day, though, Walter’s comments about seeking to expand the SEC’s disclosure authority provoked concern among some of her colleagues on the panel, particularly the lone issuer, Frank Hoadley, Wisconsin’s capital finance director.
In that session, her co-panelists also included Lynnette Hotchkiss, executive director of the Municipal Securities Rulemaking Board, and John McNally, president of the National Association of Bond Lawyers and a partner at Hawkins Delafield & Wood LLP in Washington.
“I don’t think any new regulation that’s written to try to improve disclosure by small issuers will have any impact at all,” Hoadley said.
Clark, who moderated the panel, recounted his efforts to extract financial statements from his local school district in New York. He was told he would have to file a freedom of information law request. He balked and eventually the district posted financial statements on its website.
“I don’t think my experience in that regard was unique,” Clark said.
Hoadley, who chairs the Government Finance Officers’ Association’s debt committee, joked that he’d like to blame the district’s lawyers.
“Everyone does,” quipped McNally.
Hoadley said he favored improving disclosure by touting best practices, including an ongoing effort with the NFMA to revise best practices for general obligation and tax-backed bonds.
Still, Walter said the SEC and GFOA shared the same goals, even if they viewed state sovereignty from different perspectives. “I think we agree on what the main issues are and the importance of best practices,” Walter said. “We do tend to diverge a bit on the role of the federal government.”
Walter also cited NABL’s effort, unveiled earlier this week, to jumpstart an industry-wide dialogue about public sector pension disclosure. On Monday, NABL released a 13-page roadmap, styled as a discussion draft, for boosting pension disclosure. “We are very pleased to see projects like this,” Walter said.
She also agreed with McNally that actuaries were “at risk” under the SEC’s recent settlement with the state of New Jersey.
“Actuaries are very much impacted by this,” Walter said, adding they have to realize the numbers they are generating are used in disclosure.
Still, NABL’s pension project did not spawn raves from Hoadley. “The thing we would be most disconcerted by would be seeing that project advance to becoming law or an SEC rule,” he said.