WASHINGTON -- Municipal issuers would be indirectly forced to improve their disclosure practices if Congress amends the Securities Exchange Act of 1934, a recommendation that the Securities and Exchange Commission is expected to make to legislators today, sources said yesterday.
The agency is likely to request an amendment that would make clear for the first time that the SEC has authority to implement regulations affecting municipal securities "issues," the sources said.
The amendment, if approved by Congress, would give the agency a green light to propose a rule that would bar broker-dealers from selling bonds in the secondary market if the issuer did not pledge in its official statement to provide market-sensitive information.
Under current law, the commission clearly can regulate the activities of municipal securities broker-dealers. But it is not crystal clear under the so-called Tower amendment whether the SEC has the authority to impose any rules that have indirect impact on the activities of issuers.
The Tower amendment to the Securities Acts Amendments of 1975 bars the SEC and the Municipal Securities Rulemaking Board from requiring issuers to file any documents prior to the sale of their securities and further prohibits the MSRB from mandating secondary market disclosure by issuers.
The provision does not specifically bar the SEC from requiring secondary market disclosure from issuers, but regulators, nevertheless, fear issuers will file a legal challenge if they propose rules affecting municipalities without having a firmer statutory foothold.
The SEC's proposal is expected to be included in an extensive report on the municipal market that the agency is scheduled to send this afternoon to the House Energy and Commerce Committee and the subcommittee on telecommunications and finance. The subcommittee, which is chaired by Rep. Edward Markey, D-Mass., is scheduled to hold a hearing next Thursday on the SEC's recommendations as well as those of the MSRB and the National Association of Securities Dealers.
Markey and Rep. John Dingell, the Michigan Democrat who chairs the Energy and Commerce Committee, sent letters on May 24 to the three regulatory organizations asking whether new legislation or regulations are needed to deal with political influence peddling, lagging secondary market disclosure, and other issues facing the municipal securities market.
In the letters, Dingell and Markey asked regulators whether they should introduce legislation to repeal the Tower amendment "in whole or part."
But regulators are not expected to call for a repeal of the amendment because state and local governments are strongly opposed to federal regulation of their activities and the measure is unlikely to be approved by Congress.
The 1934 law that the SEC may ask Congress to amend was the second of two major securities statutes Congress passed in the wake of the Great Depression. That act, which created the SEC, called for registration of all securities listed on stock exchanges and periodic disclosure of financial information by the issuers of those securities.
Municipal issuers were not covered by the law, and their exemption from registration was preserved in the Securities Acts Amendments of 1975, which created the MSRB that regulates municipal broker-dealers.
SEC member Richard Roberts recently said that the agency may ask Congress to amend the 1934 act to provide it with a "special grant of authority" over municipal securities issues, since that authority is written vaguely in current law. Roberts' comments about the SEC's intentions came in a speech Aug. 24 before the National Association of State Auditors, Comptrollers, and Treasurers.
But Roberts would not comment yesterday on exactly what the SEC will propose when it sends its report on the municipal market to Capitol Hill today.
Sources said yesterday that the SEC also may propose an amendment to the 1934 act that would broaden the existing authority of the NASD so that it could enforce any new provisions approved by Congress. The MSRB writes rules governing municipal securities broker-dealers, but the NASD and the SEC are charged with taking any enforcement actions against violators.
The commission also may urge Congress to amend its record-keeping and so-called "net capital" requirements to bring them in line with any new authority the agency gets in the municipal arena, the sources said. Net capital is the amount of cash or other assets that can easily be converted to cash that a firm must have on hand at all times.
