WASHINGTON — The Securities and Exchange Commission's long-awaited report on the municipal market asks Congress to give it authority to set disclosure standards for muni issuers and to provide the tools to enforce those standards.
As expected, the SEC is not seeking repeal of the Tower Amendment or wholesale removal of the exemptions for munis in the federal securities laws. The Tower Amendment prohibits the SEC and Municipal Securities Rulemaking Board from requiring muni issuers to file documents with them before offering munis. The MSRB is banned from requiring issuers to file any documents with it.
The 150-page SEC report also asking for Congress to provide it with "a mechanism" to enforce issuers' compliance with their continuing or secondary market disclosure agreements, possibly by allowing the SEC to require trustees or other entities to enforce the terms of those agreements.
The SEC wants Congress to allow it to subject corporate borrowers in conduit deals to corporate-style registration and disclosure requirements. But the munis of small businesses, nonprofits and privately-placed securities that are already exempt from corporate-style disclosure and registration requirements would continue to be exempt.
The commission is asking for legislative authority to establish the form and contents of issuers' financial statements, as well as to require certain issuers to use the generally accepted accounting principles set forth by the Governmental Accounting Standards Board. The SEC wants regulatory oversight over GASB, which it does not now have, in contrast to the Financial Accounting Standards Board, which sets accounting and reporting standards for corporate issuers, which the SEC currently oversees.
The SEC is asking Congress for authority to require certain muni bond issuers to have their financial statements audited by an independent or state auditor.
In a recommendation that would help issuers, the SEC is asking that frequent muni issuers be provided with a safe harbor that will shield them from enforcement action for making certain forward-making statements under certain conditions.
Congress should permit the Internal Revenue Service to share information with the SEC on muni related audits and returns, the SEC said.
In the regulatory arena, the SEC wants to adopt rule changes that would require major alternative trading systems to publicly disseminate best bid and offer prices and, on a delayed and non-attributable basis, responses to "bids wanted" auctions.
The SEC wants the Municipal Securities Rulemaking Board to consider rules requiring major broker's brokers to publicly disseminate, perhaps over EMMA, best bid and offer prices and, on a delayed and non-attributable basis, responses to "bids wanted" auctions.
The MSRB should consider requiring muni bond dealers to report "yield spread" information via the board's Real-Time Transaction Reporting System, the SEC said, and the board should enhance its EMMA web site to give retail investors better access to muni bond pricing and other information.
The SEC is also asking the MSRB to consider issuing more detailed interpretative guidance to assist dealers in establishing the "prevailing market price" for a muni, so that dealers can determine whether a markup or markdown on that muni would be fair and reasonable.
MSRB also should consider dealers to disclose markups and markdowns for riskless principal transactions, the SEC said. These are transactions that occur when a dealer buys and sells bonds almost simultaneously to fill an order without holding them in inventory so there is little risk of loss from market changes.
In addition, the SEC asks that the MSRB consider establishing a rule under which muni bond dealers would have to seek "best execution" of customer orders for munis, which would obligate the dealers to obtain the best prices for those customers.