Lawyers and issuers don’t believe the Securities and Exchange Commission will mandate more timely and interim financial disclosures, even though it has the power to do so.
The SEC has shown a heightened focus on interim financials and more timely audited financial statements under Chairman Jay Clayton. Earlier this month, Merritt Research Services released a study reporting that financial audits in fiscal year 2018 equaled the slowest median time in the past 11 years.
But despite the apparent ineffectiveness of regulators' efforts to get issuers to be speedier to file, few market participants believe the SEC would take the step of imposing deadlines on municipal borrowers.
Richard Ciccarone, president of Merritt, is one market participant who thinks it's likely the SEC will require more in secondary market disclosure. Ciccarone said it was a question not of if, but when.
The SEC could argue that stale disclosures have an effect on investors' ability to access the market, discouraging them, Ciccarone said.
“You could be impacted in an adverse way from not having information that you needed to know before you bought the bonds,” Ciccarone said.
“Certainly that’s a significant adverse impact to the market,” he said.
However, Clayton has repeatedly said he wants industry solutions over mandates. So the SEC would work with the industry to resolve the commission's concerns without a mandate to issuers, said Emily Brock, director of the Government Finance Officers Association's federal liaison center.
The SEC is very active and its focus has been on communication between the investor and the issuer, said Brock. The SEC is juggling a lot right now, and more secondary market disclosure requirements don’t seem likely in the near future, Brock said.
“I just don’t see that on the horizon,” Brock said.
The SEC recommended in its 2012 Report on the Municipal Securities Market that it be given additional authority to initiate changes to improve municipal securities disclosures made by issuers. The recommendations stated that this could be done within the confines of the Tower Amendment.
The Tower Amendment, named for former Texas Senator John Tower, restricts the commission as well as the Municipal Securities Rulemaking Board from directly or indirectly requiring issuers to file documents with them before their securities are sold. Regulators have instead placed certain burdens on the underwriters of the bonds, such as requiring underwriters to ensure that issuers agree to ongoing secondary market disclosure before underwriting.
But the Tower Amendment doesn't restrict the SEC from placing additional requirements on secondary market disclosures, though the SEC has historically declined to do so because of a lack of explicit statutory authority to take those steps.
“Essentially, they have pretty broad discretion to add more requirements to secondary market disclosure,” said Dave Sanchez, senior counsel at Norton Rose Fulbright and a former lawyer inside the SEC's Office of Municipal Securities.
Given that the SEC hasn’t taken much action on that front so far, it is unlikely for them to require more in secondary disclosure, Sanchez said.
“These were all legislative requests made in the 2012 report," he said. "It’s seven and a half years later and I don’t know that I’ve seen any momentum for this."
Clayton has told market participants he would like issuers to provide interim financial disclosure and more timely audited financial statements.
If the SEC does push further for interim disclosure, and issuers don’t provide it, the SEC could have a better case for future actions in making certain requirements in secondary market disclosure, Sanchez said.
“Then they have a better argument that a legislative fix is necessary because the market hasn’t improved on its own,” Sanchez said.
It is possible for the SEC to further amend its Rule 15c-12, said David Erdman, Wisconsin's capital finance director.
Rule 15c2-12 requires brokers, dealers and underwriters in primary offerings to reasonably determine that the issuer or obligated person has agreed to provide the MSRB timely notice of certain events. The SEC made amendments to the rule last year.
But as for mandating the timing of those disclosures, Erdman doesn’t see the SEC doing so.
Timeliness and interim disclosure is important to the SEC, but what they decide to do next is up to them, said Bradley Patterson, attorney at Gilmore Bell and chair of the National Association of Bond Lawyers’ securities law and disclosure committee.
The SEC could decide to create regulation, but Patterson declined to comment on how likely that would be. Regulation would be met with opposition, Patterson added.
“If they wanted to impose those regulations with respect to timeliness, they could do it,” Patterson said. “But having regulations in place as it relates to timeliness would probably be met with a little bit of opposition given the nature of the different issuers that participate in the market.”
An industry working group led by GFOA created last year has been working on solutions to address timely disclosure. The group could produce a white paper or other publication to communicate best practices in the future.
There is a high possibility that the SEC is looking for the industry to come up with a solution to secondary disclosure issues, before making any regulation decisions, said Nicole Byrd, chair of the National Federation of Municipal Analysts.
“I think the SEC is looking for the industry to come up with a solution first,” Byrd said. ”They’ve really encouraged efforts by market participants to come together and reach some kind of a consensus on appropriate disclosure.”
