Congress is now hard at work on what some believe will be a fundamental restructuring of the framework for financial market regulation. New Securities and Exchange Commission chairman Mary Schapiro, former SEC chairs Arthur Levitt and Richard Breeden, the leaders of the Municipal Securities Rulemaking Board , FINRA, leading experts in securities law, and various interest groups have all testified recently as to changes they believe are needed, including in some instances greater regulation of the municipal bond market.
Whatever the timing and outcome of congressional activity, the SEC has the ability today, without action by Congress, to take five steps toward improving the municipal market for all its participants:
1) Restore the SEC's Office of Municipal Securities as an independent office reporting to the chairman. The ability to deal effectively with municipal market issues in a timely manner requires both the ability to go directly to the chairman, when necessary, and to consult with other divisions, without first working through several supervisory layers and differing priorities.
2) Staff the office with muni market experts as well as regulators. Staffing should include at least one seasoned accountant knowledgeable in the often complex issues of municipal accounting and sensitive to the unique legal considerations arising from the status of states as sovereign entities. When each state has a unique constitution with provisions both granting and limiting the powers of local governments in contract and many other areas, one size most assuredly does not fit all. The ability to provide informed commentary and guidance on municipal accounting matters in areas such as pension reporting ultimately should enhance the quality of municipal disclosure. Without expertise behind such advice, the result may just create mischief.
3) Convene annual Municipal Market Roundtables. These events were held from 1999 through 2001 and brought together participants from all segments of the municipal market with SEC staff to discuss and debate current market concerns. The face-to-face dialogue at such events, with on occasion strongly differing perspectives, will provide a useful means to inform commission action and guidance to the market.
4) Increase the frequency of interpretive guidance provided to the municipal market under the antifraud provisions. The March 1994 Interpretive Release, Statement of the Commission Regarding Disclosure Obligations of Municipal Securities Issuers and Others, has been a very useful guide on the SEC's views towards disclosure practices in a market exempt from issuer registration and reporting, as well as a reference point in many enforcement actions. The intervening 15 years since this release have been as dynamic in the muni market as in other financial markets. While enforcement actions clearly drive home a point, periodic SEC guidance as to its views on topics both broad and specific through interpretive releases may move market behavior with greater speed and efficiency. Information gathered regarding market controversies through enforcement investigations, Market Roundtables, industry sources, reference from the MSRB, or interaction with groups representing market participants, on those occasions deemed appropriate, could be addressed through additional interpretive guidance.
5) Provide the office with the informal guidance and counseling tools used by SEC division staff to address compliance and disclosure questions. The speed with which the divisions of trading and markets and corporation finance acted in spring 2008 to provide limited no-action relief in the auction-rate securities markets deserves praise. Staff guidance might assist with more mundane issues as well.
A revitalized Office of Municipal Securities, with the ability to take the lead in coordinating with appropriate divisions such as corporation finance and trading and markets, could provide specific informal guidance when needed on questions arising under Rule 15c2-12 and other concerns. Periodic updates and publication of Questions and Answers of General Applicability, as currently practiced by the division of corporation finance, may achieve significant practical benefit. To illustrate the difference such tools might make, compare the level of guidance given to municipal bond dealers by the MSRB - "Bond Insurance Ratings: Application of MSRB Rules" - on Jan. 22, 2008, at the onset of the credit market freeze, to that available to municipal issuers. Many issuers remain confused today on appropriate action to be taken when a credit enhancer of a bond issue is downgraded.
While not requiring legislation, these five steps do require a limited reallocation of SEC resources. Implementation should not require great numbers of staff or management, but instead simply the efficient organization of a few within the larger organization so as to allow a small group to act effectively.
The federal government recently launched new programs of Build America Bonds and other municipal securities to jump-start our economy. Should securities regulatory issues arise as these are brought to market, timely SEC guidance can smooth the way for this important component of the stimulus plan. Implementation of the five steps may well serve this goal and the municipal market in general.
Paul S. Maco is a partner with Vinson & Elkins LLP in Washington and was director of the SEC's Office of Municipal Securities from 1995 through 2000. This commentary represents the views of the author and does not necessarily reflect the opinions or views of Vinson & Elkins or of any of its other attorneys or clients.
