WASHINGTON Jan 14 Two U.S. economic and policy
heavyweights - former Federal Reserve Chairman Paul Volcker and
former New York Lieutenant Governor Richard Ravitch - on Tuesday
called for more stringent federal oversight of state and local
borrowing in the municipal bond market.
Issuers in the century-old municipal market have long
guarded their ability to issue bonds against federal
intervention using the Tower Amendment, a part of securities law
that bans the Securities and Exchange Commission from requiring
them to file bond documents ahead of sales.
In a report on state budgets, Volcker and Ravitch said the
amendment should be "revisited so the SEC can require issuers to
comply with sensible disclosure requirements as well as with
robust accounting standards."
Currently, the amendment limits the SEC's jurisdiction to
fraud "and no other body has the affirmative obligation or
authority to require full transparency and disclosure of risk,"
the pair wrote in a statement introducing the final report of
the State Budget Crisis Task Force that they chaired.
Ravitch did not say how the amendment should be revised or
if it should be eliminated.
"I don't think the SEC is God's answer to every problem, but
I think the more disclosure the more the public is protected,"
he told reporters.
In July 2012, the task force released its first report on
the budget and economic problems that forced states into fiscal
tailspins during and after the 2007-09 recession.
The final report on Tuesday touched on many of the same
themes - the need for long-range budgeting; the importance of
strong federal relations; problems with low reserves and
underfunded pension systems; and stressed healthcare funding.
But it went beyond to look at finance, debt and reporting.
The task force recommended giving states strong oversight of
local governments in advance of financial emergencies, and it
called for helping states "develop rules for the creation of
concise, timely and readable financial reports."
Municipal bond disclosures, including annual financial
statements, are frequently filed late and the SEC noted in an
exhaustive 2012 report on the market that the information is
often stale. In recent cases, the commission has charged that
issuers lied about or omitted important financial details.
"The convoluted, sprawling nature of state financial
statements make them of limited use for all but individuals with
extensive training," the report said. "Both budgetary and
asset-based financial reporting should be easily accessible."
Because the task force is loaded with financial experts
including former Federal Reserve Vice Chairwoman Alice Rivlin
and former Treasury Secretary George Schultz, it could help
boost skepticism about the Tower Amendment. But it is not the
first to tilt a spear at the provision.
More than five years ago, the SEC decided to take a narrower
definition of the amendment and warned issuers they could not
hide behind it completely. Then, in 2012, the SEC suggested
Congress give it additional powers that would "meaningfully
enhance disclosure practices by municipal issuers."
Last year, the commission toughened municipal enforcement by
increasing the number of cases brought against municipalities
and setting new, strict precedents for prosecuting issuers and
broker-dealers. The most notable case was against Harrisburg,
Pennsylvania, over lack of disclosure and false public