WASHINGTON — Securities and Exchange Commission member Elisse Walter wants Congress to do away with the exemptions for municipal debt in the federal securities laws, but probably would not want the SEC to collect bond documents from issuers prior to issuance, according to bond attorneys familiar with the matter.
The sources said it is unlikely, and probably politically untenable, that the SEC would try to repeal the so-called Tower Amendment, which prohibits the commission from collecting documents from muni issuers prior to their bond sales.
Tower remains a hot-button issue among states and localities, and its repeal is unlikely to gain widespread support from lawmakers, even though some House Republicans and SEC members, including Walter, have called for, or indicated support for, its repeal.
SEC officials have said in the past that they lack the manpower and interest in pre-approving disclosures for municipal issuers the way they currently do for corporate borrowers and that they can essentially accomplish their goals without touching Tower, an amendment that was added in 1975 to the Securities Exchange Act of 1934.
If Tower were to stay in place and the registration exemptions in the Securities Act of 1933 and the Securities Exchange Act of 1934 were to be removed, the commission could develop a kind of registration-light system for munis. That could possibly require issuers to file specific information with the SEC, but only after their bond sales, the market participants said.
Walter is spearheading a series of muni field hearings through the beginning of 2011 that are designed to lead to recommendations for legislative and regulatory changes as well as industry "best practices."
In an Oct. 29 speech before lawyers in Los Angeles, she said the biggest limitation on the SEC's ability to regulate and oversee the municipal market stems from registration and civil liability exemptions in the Securities Act of 1933 and the muni carve-outs to the system of periodic reporting under the 1934 act.
"I have suggested in the past that Congress should repeal the exemptions for municipal securities from the '33 and '34 acts," Walter said. "Given the wide range of purposes and structures of the over 50,000 municipal issuers, however, I would certainly not propose to treat municipal securities exactly like corporate securities — and I do not believe that a one-size-fits-all approach would be appropriate. Nonetheless, appropriate legislative change would allow the commission to take important steps to improve the quality and availability of municipal issuer information to investors."
Walter also stressed she is keeping an open mind during the field hearings.
"Although I have thought about these issues for a long time, and have publicly expressed my views about the need for legislative and regulatory changes, I am committed to listening and learning during the field hearings, to deepening and broadening my knowledge base, and to reexamining and perhaps changing my opinions as a result," she said.
She said non-governmental conduit borrowers should be subject to mandatory registration and disclosure, as would be the case if they issued their securities directly without using muni issuers as conduits.