* SEC seeks greater transparency in muni market
* Laws have limited SEC ability to oversee states and local
* Proposed oversight could hamper local issuers
By Karen Pierog and Lisa Lambert
July 31 The U.S. Securities and Exchange
Commission said on Tuesday it wants to extend its regulatory
reach into the $3.7 trillion municipal bond market, where states
and cities that sell debt have largely escaped the kind of
scrutiny faced by participants in other capital markets.
The SEC released a report that was two years in the making
which focuses on improving issuer disclosures and on increasing
But the SEC's proposed enhanced oversight of the market,
which would involve enforcement of standards for financial
statements and requirements for ongoing disclosure, may rile
some issuers used to less-stringent procedures.
The SEC enforces rules for the market that are written by a
self-regulatory organization made up of banks, issuers and
advisers called the Municipal Securities Rulemaking Board.
Various laws have limited the SEC's ability to oversee
states and local issuers, leading to a hodgepodge of accounting
techniques and financial disclosures available to investors
weighing whether to purchase their debt.
Saying the commission did not "intend to put this report on
a shelf," SEC Commissioner Elisse Walter in a conference call
with reporters said the commission would move promptly on
recommendations it can carry out alone, but she gave no details
on possible action.
The financial struggles of states and cities as a result of
the weak economy over the last several years have created a
desire for better disclosure and record-keeping.
Several high-profile municipal defaults and bankruptcy
filings, including Jefferson County, Alabama, and several cities
in California, along with growing public pension burdens have
left investors and political leaders eager for more information.
So, too, have concerns that institutional investors have an
unfair advantage over individual buyers.
"We heard the concerns voiced by many ... that investors in
the municipal securities market don't have all the protections
and access to information that they need," Walter said.
These concerns have been raised by issuers as well. In
Alabama's Jefferson County, whose $4.23 billion bankruptcy in
November involved credit swaps and other financial derivatives,
government officials said greater disclosure might have
prevented America's biggest-ever municipal bankruptcy.
"Good for them," County Commissioner Jimmie Stephens said on
Tuesday in Birmingham. "If we had those regulations in place,
before all the swap agreements, I wonder if we would be here."
However, Frank Hoadley, Wisconsin's capital finance
director, said the SEC appears to be asking for "everything
including the kitchen sink."
He said some of the SEC's recommendations would involve
revisiting 1975's Tower Amendment, which limited the SEC's and
the MSRB's authority to require muni issuer reporting related to
their bond sales.
The Securities Industry and Financial Markets Association
welcomed relief for its broker-dealer members from current
"SIFMA and its members have been frustrated that many
aspects of the current disclosure regime are affected indirectly
through the broker-dealer community," said Leslie Norwood,
SIFMA's co-head of municipal securities. "We do have concerns
about any changes that might cause significant additional
burdens to the issuer community."
Investors, however, may find the SEC's proposals beneficial.
"They're recommending some pretty strong improved disclosure
practices that investors are likely to welcome," said Richard
Ciccarone, a managing director at McDonnell Investment
Management in Oak Brook, Illinois.
HEADACHES FOR ISSUERS
Regulators are worried that lack of disclosure is masking
fraud or other problems. Two years ago, the SEC rapped the state
of New Jersey for not fully disclosing the financial troubles of
its public pension system.
Even as the regulatory whip cracks more frequently in the
muni market, issuers and underwriters often file disclosures
such as annual financial statements late or not at all.
Last August, the MSRB said it received 3,550 notices over
the course of two years that cities, states and local
authorities would be late filing annual financial information,
at an average rate of 148 notices per month.
Tom Dresslar, a spokesman for California Treasurer Bill
Lockyer, said a preliminary review of the SEC's report shows it
is not seeking a one-size-fits-all approach for issuers, and the
calls are for incremental additions to federal regulation.
But Ben Watkins, head of Florida's Division of Bond Finance,
said compliance is going to be complicated for smaller issuers.
"It sounds compelling but would prove burdensome to small
issuers," he said. "I am a very different issuer from the City
of Hialeah. We have the resources and we can comply. Smaller
issuers might find compliance problematical."
The report recommends using general guidelines, or
principles, on what information issuers must provide. It also
suggests allowing issuers to make forward-looking statements,
deeming failure to file disclosures a violation of securities
law, and having different requirements for smaller issuers.
"The report is a carefully considered comprehensive approach
to regulation," said John McNally, former president of the
National Association of Bond Lawyers, adding it "acknowledges
the diversity of the municipal market by its consideration of
'principles-based' disclosures and scaled, or tiered, content
PRICE DISCOVERY, TRANSPARENCY ADDRESSED
Walter told reporters that another goal of the report is to
address price discovery and price transparency in the market.
The muni market is largely illiquid, and most bonds do not
trade on a daily basis, meaning the pricing of these bonds is
largely determined by the banks and brokerages.
The question has come up in the wake of manipulation by a
number of banks of the LIBOR rate, which is marginally used in
the muni market.
On Tuesday, MSRB Chairman Alan Polsky said that the board
"appreciates the work of the SEC," but that the board still must
review the recommendations.
The MSRB is reviewing how several market indexes are
prepared, including those published by Municipal Market Data, a
Thomson Reuters company. The MMD benchmarks are used to set
rates for states, cities and other issuers that sell muni debt.
Thomson Reuters has been holding discussions with the SEC
and MSRB in the course of their reviews of the muni market.
James Smith, CEO of Thomson Reuters Corp ,
said Tuesday on a conference call following the release of the
company's earnings that "we get lots of questions just across
the board on these issues and we are always very forthcoming and
cooperative with all regulatory agencies on all the matters that
they are investigating. But at this point we do not believe we
have any exposure at this point at all."