The Securities and Exchange Commission has had to put its initiatives to improve municipal disclosure and accounting standards on the back burner because of the ongoing credit crisis, but still plans to propose changes to its disclosure regulations, the SEC's municipal securities chief said this week.
Martha Mahan Haines told attendees at the Investment Company Institute's Equity, Fixed-Income & Derivatives Markets conference in Manhattan late Monday that SEC staff are drafting proposed changes to Rule 15c2-12 on disclosure that the commission will propose "within the coming weeks and months."
But she added that the time frame is not set in stone because of the financial turmoil.
Haines' remarks come after SEC chairman Christopher Cox said in an interview in early September that the agency would propose changes to 15c2-12 before the end of the month. The changes would come on top of the proposed amendments to the rule the commission proposed in July that would mandate issuers file secondary market disclosures with the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system.
Though knowledgeable sources have said that the SEC staff is considering at least two specific proposals that go beyond the initiatives Cox proposed in a white paper last year, Haines declined to discuss the specific changes the commission will seek.
"We're really taking a holistic approach to looking at this rule to see where it might be improved," she said. "We've reviewed a number of things, material events [and] exemptions."
Under 15c2-12, a dealer may not underwrite munis unless the issuer of the bonds has contractually agreed to disclose to the four nationally recognized repositories financial and operating information at least annually, as well as the occurrence of any of 11 specified material events, such as rating changes, bond calls, and adverse tax opinions or events affecting the tax-exempt status of the bonds. The changes to 15c2-12 proposed in July, which Haines said the commission will likely vote on before the end of the year, would essentially replace the four national repositories with EMMA.
In his white paper last year, Cox urged Congress to consider making municipal disclosure more like corporate disclosure, arguing that the muni disclosure regime is stale and outmoded in light of the growth in size and sophistication of the market since the rules were written more than 14 years ago.
States and localities did not welcome the initiatives, which they deem unnecessary because municipal bond default rates are low. Still, the initiatives - some of which can only be accomplished if Congress amends or repeals the 1975 Tower Amendment to the Securities Exchange Act of 1934 - have gained some interest among Republican lawmakers in the House, who were instrumental for pushing for a hearing last month on the matter before the House Financial Services Committee, though it was ultimately canceled because of the financial crisis. The amendment bars the SEC and Municipal Securities Rulemaking Board from requiring municipal issuers to directly or indirectly file documents with them before issuing municipal securities.
Cox said last month that Tower "stands athwart" of the SEC's efforts to address a range of muni disclosure issues because the commission's direct authority extends only to broker-dealers. But he said the amendment may only need to be altered, not fully repealed, to better equip the SEC.
In her remarks on Monday, Haines joked that she worries each time the SEC prepares to promote the initiatives before members of Congress at a hearing, a financial catastrophe prevents the hearing from actually occurring.
Haines said lawmakers first calendered a hearing on the initiatives last August, but it was canceled when bond insurers' credit ratings began to slide because of their exposure to subprime mortgage products. In February, when the SEC was told a second time that lawmakers planned to hold hearings on the muni initiatives, the auction-rate market collapsed.
Then last month the House Financial Services Committee was to hold a hearing on the initiatives Sept. 23, but cancelled it as major Wall Street securities dealers merged with other firms, filed for bankruptcy, or sought bank holding company status, and federal regulators proposed a massive bailout package.
"We were calendered for a couple weeks ago, and then the credit markets froze up," Haines said. "I mean honestly, I can't take it any more, I'd rather just skip it."
At Monday's panel, Haines was joined by some investment company officials who support the initiatives, including Mary Colby, managing director and head of municipal research at Charles Schwab Investment Management. She said that even though issuers are required to file financial information once a year, the filings are stale because they are often made 180 to 270 days after the end of the fiscal year.
"Our number one request would be that annual financials be required to be filed on a much more timely basis," Colby said. "It's hard to understand how a company like General Electric or Citigroup can get their financial done in 60 days but a government cannot." She added that analysts also would like periodic updates throughout the fiscal year on states' and localities' financial health.
Haines asked why the market could not replicate the discipline in the more volatile health care sector, where investors have refused to purchase securities from issuers that do not provide quarterly financial information.
Investors "have so much more power than a regulator does - you can make a change in this market very quickly if you start demanding more information in an ongoing basis," she said.
Colby said that while "conceptually" she agrees with Haines on the need for market discipline, it's hard to maintain because funds have capital that they must quickly use to purchase securities. She also noted that one-third of municipal market investors consist of retail investors who are hard to corral.
"There are a lot of buyers who are not buying on credit, they're buying on other factors and they don't care about disclosure," Colby said. "If all of the mutual fund buyers stand up and say we're not buying something, there are still a lot of people out there who are buying and who undercut our requests for disclosures."