SEC wants additional authority to make changes to municipal market

By Angela McDaniels

Tacoma, Wash., July 31 - The Securities and Exchange Commission recommended that several changes be made to the municipal securities market in a report issued on Tuesday.

The report follows a review of the municipal securities market that began in mid-2010. The SEC said the recommendations address concerns raised by market participants and others in public field hearings and meetings as well as the public comment process.

The report focuses on two key areas of concern: disclosure and market structure.

On the topic of disclosure, the SEC said market participants raised concerns related to the content and timeliness of financial information in primary offerings. The major challenge in secondary market disclosure, according to many market participants, is the timeliness and completeness of filings as well as compliance with continuing disclosure agreements.

Disclosure recommendations

The SEC wants additional authority to initiate changes to improve disclosure. It noted that the Securities Act of 1933 and the Securities Exchange Act of 1934 have broad exemptions for municipal securities issuers, and there is no express statutory authority in the Exchange Act over disclosure by municipal issuers.

The SEC listed the following as possible legislative approaches that could be used to give it greater authority:

• Authorize the SEC to require that municipal issuers prepare and distribute official statements and disclosure during the outstanding term of the securities and provide tools to enforce these requirements;

• Amend the municipal securities exemptions in the Securities Act and the Securities Exchange Act to eliminate the availability of these exemptions to conduit borrowers who are not municipal entities;

• Authorize the SEC to establish the form and content of financial statements for municipal issuers;

• Authorize the SEC to require municipal securities issuers to have their financial statements audited;

• Provide a safe harbor from private liability for forward-looking statements of repeat municipal issuers who are subject to and current in their ongoing disclosure obligations;

• Allow the Internal Revenue Service to share with the SEC information that it obtains related to municipal securities offering; and

• Provide a mechanism to enforce compliance with continuing disclosure agreements and other obligations.

The SEC has regulatory approaches that it could consider under its existing authority without further action from Congress, although it believes these may not be enough on their own to address its concerns.

As examples of possible regulatory actions it could take, the SEC said it could host an annual conference on the municipal securities markets and consider issuing updated interpretive guidance about disclosure obligations of municipal securities issuers.

In addition to the legislative and regulatory approaches noted above, the SEC said it recommends that market participants continue to "strive for high-quality disclosure practices through the development and enhancement of best-practices guidelines."

Structure recommendations

On the topic of market structure, the SEC made several recommendations about improving price transparency and promoting fair access to those prices.

In order to improve pre-trade price transparency, the SEC said

• It could consider requiring an alternative trading system with best bid and offer prices and, on a delayed and non-attributable basis, responses to "bids wanted" auctions; and

• The Municipal Securities Rulemaking Board could consider rules requiring a brokers' broker with material transaction or dollar volume in municipal securities to publicly disseminate the best bid and offer prices on any electronic network it operates and, on a delayed and non-attributable basis, responses to "bids wanted" auctions.

On how to improve post-trade price transparency, the SEC said the following:

• The MSRB could consider requiring municipal bond dealers to report "yield spread" information to its Real-Time Transaction Reporting System to supplement existing interest rate, price and yield data; and

• The MSRB should pursue enhancements to its EMMA website so that retail investors have better access to pricing and other municipal securities information.

In order to buttress existing dealer pricing obligations, the SEC said

• The MSRB and the SEC should consider initiatives to improve the understanding of retail investors about the ways in which they might buy or sell a municipal bond;

• The MSRB and the SEC could consider ways to encourage the use of alternative trading systems or similar electronic networks;

• The MSRB should consider encouraging or requiring municipal bond dealers to provide retail customers relevant pricing reference information;

• The MSRB should consider issuing more detailed interpretive guidance to assist dealers in establishing the prevailing market price for a municipal security;

• The MSRB should consider requiring municipal bond dealers to disclose to customers, on confirmations for riskless principal transactions, the amount of any markup or markdown; and

• The MSRB should consider a rule that would require municipal bond dealers to seek "best execution" of customer orders for municipal securities.

MSRB response

The MSRB said it will review the recommendations.

"The MSRB appreciates the work of the SEC to gather input from a broad array of municipal market stakeholders on potential steps toward increasing confidence in the municipal market, improving the level and quality of available information and addressing important market structure issues," MSRB chair Alan Polsky said in a news release on Tuesday.

"We will review the recommendations of the SEC report as part of our ongoing effort to facilitate municipal market transparency, improve disclosure and ensure a fair and efficient market."

Sifma comments

The Securities Industry and Financial Markets Association is supportive of efforts to improve the quality and timeliness of disclosure but has "concerns about any changes that cause significant additional burdens to the issuer community," according to a statement from Leslie Norwood, co-head of Sifma's municipal securities division.

Among other things, Sifma is also concerned about eliminating the exemptions from the Securities Act and the Exchange Act for conduit borrowers who are not municipal entities.

"Many non-profit hospitals and institutions of higher education serve a public purpose and benefit from the tax exemption," Norwood said.

The statement expressed support for providing a safe harbor from private liability for forward-looking statements of repeat municipal issuers, allowing the IRS to share information with the SEC and providing a mechanism to enforce compliance with continuing disclosure agreements.

On market structure, Norwood said Sifma feels that MSRB's current rules on fair pricing and disclosure of yields is the best way to "ensure that dealers of different business models can operate on a level playing field and that investors have sufficient relevant market information."

Norwood said Sifma will discuss its concerns with its members and work with the SEC and Congress moving forward.

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