WASHINGTON – The Securities and Exchange Commission’s Investor Advisory Committee voted Thursday to approve a set of recommendations that would improve disclosure in the municipal bond market, though some members asked if the panel could address other concerns.

The committee, a product of the Dodd-Frank Act tasked with advising the SEC on investor protection issues and promoting confidence in the securities markets, voted by voice to approve the recommendations during a meeting in Atlanta.

The recommendations include moving forward with a narrowed set of amendments to the SEC’s Rule 15c2-12 on disclosure and updating the SEC’s 1994 interpretive guidance addressing disclosure issues in both the primary and secondary markets. Produced by a small subgroup, the recommendations generally found favor with the full committee but were too modest in the eyes of some members.

Matthew Furman, general counsel at multinational risk advisor and insurance brokerage Willis Group who chaired the subcommittee that produced the recommendations, said that the 15c2-12 proposal is “fundamentally sound” and should move forward after being narrowed.

The SEC’s proposal would require an issuer or borrower to file an event notice if they incur a financial obligation that is material or that has an agreement to [material] covenants, events of default, remedies, priority rights or similar terms "any of which affect securities holders." The proposal also would require an event notice to be filed for certain actions or events related to the financial obligation that "reflect financial difficulties" such as a default, event of acceleration, termination event, or modification of terms.

The IAC suggested narrowing the language of the proposal to address complaints that it was overly broad, It said “financial obligation” could be defined to encompass indebtedness and similar obligations but not leases.

SEC Investor Advocate Rick Fleming
SEC Investor Advocate Rick Fleming

Elisse Walter, a former acting chairman and commissioner of the SEC said she was not involved in creating the recommendations but believes they are “fabulous.” Many of the recommendations mirror those included in the SEC’s 2012 Report on the Municipal Market, which Walter was the driving force behind.

Market groups generally have received the IAC recommendations warmly. The Government Finance Officers Association said earlier this week it was happy to see the committee address some of the GFOA’s concerns about the 15c2-12 amendments, but remained cautious about a proposal to include on EMMA “flags” alerting investors that an issuer is not in compliance with its continuing disclosure obligations.

The Securities Industry and Financial Markets Association urged the SEC to narrow the definitions in the proposed 15c2-12 amendments and expressed support for an update to the 1994 guidance. Bond Dealers of America chief executive officer Mike Nicholas told The Bond Buyer that the BDA wants an opportunity to comment on any changes to the amendments before the SEC finalizes them.

IAC member Damon Silvers, director of policy and special counsel at the American Federation of Labor and Congress of Industrial Organizations, said he is not as concerned about investor protection issues in the muni market because most muni investors are wealthy individuals. Silvers was more concerned about market integrity, saying he thought the rising death toll in Puerto Rico “has as much to do with the muni market as it did with hurricanes” and adding that he has concerns about insider trading in the muni market.

Silvers was the author of a May 16 letter he sent to SEC muni enforcement chief LeeAnn Gaunt asking her to probe whether any member of Puerto Rico Gov. Ricardo Rosselló’s staff leaked non-public information about the commonwealth's fiscal plan prior to its February release, leading to “irregular trading patterns” in Puerto Rico general obligation bonds.

Jerome Solomon, fixed-income portfolio manager at Capital Group, a risk advisory and insurance brokerage firm, took issue with Silvers’ comments. Solomon said there have been relatively few large muni transactions in Puerto Rico in recent years and added that investors have limited control over what governments do after the bonds are issued. Solomon added that the muni market also includes many middle-class investors besides the very wealthy.

Silvers said he would like to see some language about his secondary market concerns in the recommendations. The committee agreed to let him and Solomon try to come up with some mutually agreeable language to be circulated to the committee at a later time. Silvers abstained from voting on the current recommendations.

Lydia Mashburn, managing director at the Center for Monetary and Financial Alternatives at the Cato Institute, said the SEC might want to reconsider legislative changes to enhance disclosure practices of issuers.

SEC Investor Advocate Rick Fleming said he preferred to keep the recommendations “clean,” rather than include anything about repeal of the Tower Amendment. Named for former Texas Republican Sen. John Tower, the Tower Amendment prevents the commission as well as the Municipal Securities Rulemaking Board from directly or indirectly requiring muni issuers to file documents with them before their securities are sold.

“That I think would be viewed as not exactly a modest proposal,” Fleming said.

Walter said that the 2012 report included legislative approaches that would not require repeal of Tower, which Fleming acknowledged.

The SEC may consider the committee’s recommendations, but is not bound by them.

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Kyle Glazier

Kyle Glazier

Kyle Glazier is the Deputy Washington Bureau Chief of The Bond Buyer. He covers securities law, regulation, and enforcement.