WASHINGTON - Rep. Ron Wyden, D-Ore., has proposed that negotiated bond issues be reviewed by an independent panel before being offered to the public, in order to lessen the possibility that such deals are being steered to under-writers who make big political contributions.
"It seems to me that if political influence is a concern, an independent review of bond issues prior to offering ought to be a uniform requirement prescribed by federal regulation." Wyden said yesterday in a letter to Securities and Exchange Commission Chairman Arthur Levitt.
"Such a requirement if appropriately flexible would eliminate some of the grosser aspects of political wheeling-and-dealing apparent in this business, and increase investor confidence in the market," Wyden said.
Wyden, chairman of the House Small Business Committee's regulation subcommittee, said the requirement also would increase access to bond sales, especially for small underwriters.
"I am concerned that many such disappointed underwriters have been smaller firms unable to compete against larger companies with long-established, and politically-enhanced, ties to various issuing agencies," he said.
The Wyden letter does not elaborate on how the independent review of bond sales would be conducted. Some states have varying requirements for third-party review, while others have no mandates.
Steve Jenning, staff director of the regulation subcommittee, said Wyden's thinking is that "if this was a federal requirement, wouldn't we be able to secure an additional layer of confidence in the system?" Jenning added that the concept was left simple in order to give Levitt and the SEC some "room to ruminate."
When asked whether Wyden had concerns that the so-called Tower amendment might create problems in setting up such a requirement, Jenning said: "No, not really, because there is a strong sense that Tower will get a thorough review this year, so why not throw some ideas into the mixing bowl?"
The Tower amendment, enacted in 1975 as part of other amendments to the 1934 Securities Act, restricts the ability of federal agencies to regulate municipal bond issuers.
Earlier in the week, Wyden received an SEC memorandum from Levitt responding to questions put to the agency in late May regarding the rise of negotiated bond sales. The SEC memo stopped short of saying whether or not there have been too many negotiated underwritings.
So far this year, according to Bond Buyer statistics, more than 80% of the $205 billion in long-term municipal bonds sold have been sold through negotiation.
In a Sept. 21 letter accompanying the memo, Levitt told Wyden that although "negotiated offerings have their place in many cases," the SEC recognizes that competitive bidding tends to provide cost savings to issuers and presents "fewer opportunities for issuers to show political favoritism in competitive offerings.
"As a general matter, the commission believes that issuers should constantly evaluate the benefits of competitive bidding as they explore financing alternatives," Levitt said.
Levitt said the agency "shares" Wyden's concern about municipal bond practices, and "has begun an investigation into the methods through which underwriters obtain municipal underwriting business. "
The SEC memo provides an overview of the market and a preliminary response to questions posed by Wyden in May, such as whether there are adequate safeguards in place to protect against the steering of bond contracts.
The memo notes that procedural requirements for issuing and selling municipal bonds vary widely from state to state and are a matter of state law. "Because the staff possesses no expertise in state bond law, the staff is unable to offer Chairman Wyden its opinion on this subject," the memo says.
In his letter yesterday, Wyden urged the SEC to provide complete answers" to his prior questions as well as an analysis of the third-party review concept.
Wyden also said he recommended "no further delay" in implementation of campaign contribution disclosure requirements.
He noted that the Municipal Securities Rulemaking Board already has put out for comment proposed rules for disclosure of political contributions. "Barring a serious objection by the SEC, I would hope that the muni board effort concludes swiftly with regulations, reporting requirements, and appropriate restrictions in this area," Wyden said.
