WASHINGTON — The Securities and Exchange Commission will consider whether to propose additional amendments to its Rule 15c2-12 on municipal bond disclosure on Wednesday, according to a notice released this week.
The five-member commission also will consider whether to release “interpretive guidance intended to assist municipal securities issuers” and broker-dealers in preventing securities fraud.
The one-page notice, released late Wednesday, does not provide any additional details, but sources have said for weeks that the proposals are likely to include an update to the list of 11 types of material continuing disclosure events, which currently include rating changes, bond calls, and adverse tax opinions or events affecting the tax-exempt status of the bonds.
Several market participants said they expect the staff to propose incremental changes rather than wholesale revisions to the rule. In addition, they said the staff could propose extending disclosure requirements to variable-rate demand obligations. Currently, VRDOs are exempt from muni disclosure requirements. Typically they are backed by bank-provided liquidity facilities, but during the financial crisis, when banks were stressed, they could not be remarketed to investors and had to be put back to the banks.
SEC chairman Mary Schapiro has said for months that the commission will propose changes to make muni disclosure to be more like corporate disclosure in terms of quality and timeliness.
The SEC notice was silent on whether it will outline legislative changes for the municipal market that it would like Congress to consider, as former chairman Christopher Cox did in a white paper to key lawmakers two years ago. The white paper gained hardly any support on Capitol Hill and was opposed by issuers, with the exception of a provision calling for the establishment of a central repository, a role the Municipal Securities Rulemaking Board was willing to fill.
Wednesday’s SEC meeting comes a day after Schapiro is set to testify before a House Financial Services Committee panel on SEC oversight of the securities markets.
Paul Maco, a partner at Vinson & Elkins LLP here and the former head of the SEC’s office of municipal securities, noted that commission officials repeatedly say they have limited authority under the existing regulatory structure to oversee the municipal market. They do not have the authority to directly regulate issuers, who are exempted from SEC registration. Meanwhile, the 1975 Tower Amendment restricts the SEC and the MSRB from collecting issuer disclosures before they sell bonds.
“It will be interesting to see how far they attempt to push that authority in their proposals” on Wednesday, Maco said, noting that the muni market has changed considerably since the continuing disclosure rules were adopted in 1994.
Another market participant who asked not to be named speculated that the amendments to 15c2-12 will seek to speed up the time frame in which issuers must file their annual financial documents with the MSRB, possibly to four months after the end of their fiscal years. Currently, they are only required to file the documents on an annual basis and the rule does not provide a deadline for any of the filings.
The source also said the SEC may clarify whether elected officials have a duty to review official statements all of the time or only in instances in which the officials have specific information to suggest the issuer would have trouble repaying the securities, as was suggested in a 1995 commission report on Orange County, Calif.’s bankruptcy filing and disclosure debacle.
Ben Watkins, director of Florida’s Bond Finance Division, said it is frustrating that the SEC would issue a notice of a meeting without outlining the draft proposals to be considered. He noted that issuers would have to be “vigilant” to make sure the SEC does not propose changes they strongly oppose.
“If if you’re going to put out a notice that you’re going to have a meeting, I think it’s incumbent on you to put out the [draft] proposal so people know what you’re thinking about,” said Watkins, who is a member of the Government Finance Officers Association’s debt committee. “Otherwise you’re in compliance with the letter of the law but not in the spirit of keeping people informed.”