WASHINGTON — The Securities and Exchange Commission's approach to municipal market enforcement risks may be creating an environment where only big players will get a seat at the table, a Republican congressman warned on Tuesday.
Rep. Steve Stivers, R-Ohio, raised the concern with SEC chair Mary Jo White during a House Financial Services Committee hearing on the commission's agenda and budget. White was the sole witness. Stivers, who last year coauthored a letter to White threatening to use legislation to weaken the SEC's Municipalities Continuing Disclosure Cooperation Initiative, said smaller issuers and dealers could both suffer negative effects from the program.
The initiative offered both issuers and dealers a chance to get lenient settlement terms from the SEC if they self-reported any instances during the past five years in which they falsely claimed in official statements to be in compliance with the issuer's continuing disclosure agreements. The settlements also would cover cases where the OS' were silent while the issuer was not in compliance. The reporting deadlines of Sept. 10 for issuers and Dec. 1 for dealers has passed, but the SEC is still working on what commission officials have characterized as widespread participation in the voluntary enforcement program.
Responding to an earlier question, White had said the MCDC sent a very strong message to the market. While the maximum financial penalties under the MCDC — $500,000 for the largest underwriters and $100,000 for the smallest — would be nothing more than a "rounding error" for the biggest firms, they would be devastating for smaller firms, Stivers told White.
"For little guys, it'll put them out of business," Stivers told White.
Many market observers have said that smaller, less sophisticated issuers are much more likely to struggle with continuing disclosure compliance than larger ones, and Stivers said his district in Ohio has a number of smaller municipal issuers that he is concerned could be hurt by a change in market practices after the MCDC. Stivers has been very active on muni issues and has been a recipient of thousands of dollars of campaign contributions from dealer groups.
"What have you learned that will make sure that the little municipal issuers will not be squeezed out?" Stivers asked White. "They will have difficulty getting access to capital if you do things like the MCDC wrong."
White said that the SEC made the decision not to seek civil financial penalties against issuers under the MCDC, and that the goal of the initiative was to protect the investing public.
"It's really for the benefit of retail investors," White told Stivers.
In her testimony, White updated the committee on the SEC's agenda and provided justification for the commission's $1.72 billion fiscal year 2016 budget request. White said the money would help the SEC keep pace with technological advances and strengthen both its examination and enforcement programs. Committee chairman Jeb Hensarling, R-Texas, told her that the SEC's budget has already grown 400% since 1995.
Maxine Waters, D-Calif., the committee's top Democrat, told White the SEC had support on her side of the aisle.
"My Democratic colleagues and I support full funding for the SEC," Waters said.
