WASHINGTON — This isn’t the first time the Securities and Exchange Commission’s has had conduit bonds in their cross hairs.
For roughly 40 years, the commission has clashed in a “regulatory tug-of-war” with Congress over regulation of borrowers of conduit bonds, which historically have higher default rates than traditional munis, said Paul Maco, a lawyer at Bracewell & Giuliani LLP.
The tussle stretches to at least 1968, when the SEC adopted Rule 131, which sought to require conduit borrowers to register their securities offerings. The rule deemed the lease, sale or loan agreement of a conduit borrower to be a “separate security” that had to registered, said John McNally, partner at Hawkins, Delafield & Wood LLP. The rule included exemptions for some public projects.
In 1970 Congress fired back, largely nullifying the rule by amending the Securities Act of 1933 to exempt “industrial development bonds” — now commonly called private-activity bonds — from registration requirements.
In its 1993 staff report on the muni market, the SEC revisited the issue, requesting that securities laws be amended to remove the registration exemptions for the tax-exempt bonds of corporate borrowers in muni conduit deals.
“At a minimum, the staff would support legislation requiring registration of all corporate obligations underlying municipal conduit securities,” the staff wrote in the 1993 report.
In 2007, then-SEC chairman Christopher Cox asked Congress in a white paper to enact legislation that would require corporate conduit borrowers in the muni market to meet the same registration and disclosure standards they would be subject to if they were not borrowing through a municipal issuer.
The SEC fired the latest volley on July 31, when it recommended in its report on the municipal market that Congress eliminate the exemption in the Securities Act of 1933 for conduit borrowers. If Congress acts on the SEC’s recommendation, borrowers of many private activity bonds would be required to register with the SEC, and would be subject to periodic reporting requirements. Nonprofit borrowers and privately-placed securities would continue to be exempt.