MINNEAPOLIS -- Issuers of municipal bonds lashed out at a key Securities and Exchange Commission official Monday, charging that the agency's new initiatives on disclosure and political contributions are excessive and an unfair indictment of most market participants.
"We're honest people. But you are saying that you think we're dishonest," Joseph R. Caputo, comptroller of Suffolk County, N.Y., told David Sirignano, senior legal adviser for corporation finance at the SEC and a principal drafter of the SEC's new legal interpretation on disclosure that was issued March 9.
"I strenuously object" to that characterization, said Caputo in a comment made from the audience during a workshop on disclosure held at the Government Finance Officers Association's annual meeting. Sirignano appeared on the panel.
"I resent the implication that there is some kind of fraud, dishonesty, and lack of proper disclosure" by issuers, said D. Catherine Mueller, manager of accounting and finance for the Kent County Department of Public Works in Grand Rapids, Mich.
The SEC has "blithely" decided that it has the legal authority to impliment its disclosure initiatives, one unidentified audience participant said.
"Maybe you need to go back to Congress and get clear authority. Or maybe it's time to start cracking down on the few that are guilty and leave the rest of us alone. Disclosure is desirable. But there is no statistical data anywhere that we are dealing with" a major problem, he said.
Sirignano countered that the SEC's objective is not to clean up pervasive problems, but instead to head them off.
"Were trying to anticipate problems, not react. It's very easy to beat up regulators after [a savings and loan] crisis when billions of dollars walk out the door. You say, ~Where were the regulators?' We don't think that's the way you approach a problem," Sirignano said.
The issuers' wrath was directed in part at the SEC's March 9 interpretive release, which warns issuers that public access to current and reliable secondary market disclosure is uneven and inefficient. To minimize the risk of misleading investors, issuers should set up ongoing procedures to disclose material information in a timely fashion, it says.
The release also reminds issuers that their disclosures are subject to the antifraud statutes and points to areas that need improvement, including disclosure of potential conflicts of interest stemming from political contributions. It reminds issuers that even informal statements by elected officials could be material if they are reasonably likely to reach the market.
Issuers also spoke out against the Municipal Securities Rulemaking Board's rule recently approved by the SEC that is designed to end "pay to play" practices in the municipal arena.
Suffolk County Comptroller Caputo bitterly objected to what he sees as inequities in federal rules on political contributions. "What makes a contribution to a senator or a congressman okay, [but] the contribution to the governor or mayor or comptroller a bad idea?" he asked.
"I think if you want to go after the people who have committed the crimes, go after the city comptroller who abused her position. Go after the governor who had his chief of staff abuse his position, and put them in jail. But don't come after us for doing our business every day because you are only making our job harder," Caputo said.
"I would like to tell Mr. Levitt that. Because where the heck did he come from if not for his father's name?" said Caputo, whose remarks drew a round of applause from the audience. He was referring to SEC Chairman Arthur Levitt Jr., who has aggressively pushed for reforms in the municipal arena and whose father served as New York State comptroller for a number of years.
"We are not regulating contributions. We are regulating disclosure," Sirignano said. "What kind of contributions might be material to investors? That's the question we are asking.
"The link here is the finance official who is making decisions about who will participate in the underwriting. To the extent that ... the circumstances are significant enough to raise ... questions in the minds of investors, that's the link that makes it material," Sirignano said.
One audience participant said he has no idea what third-party relationships the professionals working on a deal might have.
"What do we know as issuers about the relationship our financial adviser has with Prudential Securities, or our bond counsel has with the underwriters on other deals? We have no idea whatsoever. All we know is that bond counsel represents us, underwriter's counsel represents the investment broker, and the financial adviser is supposed to protect us," he said.
Audience and panel members were particularly concerned about the potential liability from off-the-cuff remarks by issuer officials.
"Some of the governments [represented] here may have 20 elected officials," said G. Michael Miller, director of finance for Orlando, Fla. "Any one of them may go off and make some God knows what statement that is not rational or justified. If you assume that we have one person you can contact to get the information, you do not understand the world we work in," Miller told Sirignano.
Jeffrey Green, general counsel of the Port Authority of New York and New Jersey, who moderated Monday's session, posed a hypothetical question about statements by elected officials.
"Say you have a jurisdiction with multiple elected officials, each charged with a particular responsibility by statute or constitution," Green said. "The budget may be two months late, and each of those officials makes a public statement. Is there a need to filter each of those public statements as it comes through into the secondary market repository?"
Sirignano said corporate shareholders have a related problem and have managed to work it our. They may not have to negotiate their way through the sometimes conflicting statements of city council members campaigning for re-election. But they are exposed to the aggressive advertising of corporations that paint rosy pictures of their products, he said.
"I'm not going to say it's a bright line," Sirignano said. That is why the interpretive release suggests that issuers develop routine practices for getting annual and event information out to investors so they always know where they can look for reliable information, he said.
"I don't think it's that difficult a problem," Sirignano said. "I'm sure these issues will be hammered out quite easily."
Green said that based on comments he has heard from SEC officials, he is confident that something can be worked out "language-wise by the commission to provide assurance [to issuers] in this area.
"I'm confident that something can be worked out recognizing the difference between the municipal market and corporate market," Green said. "But if something is not worked out it could be a major problem for the industry. It's real issue but it should not take rocket scientists to solve, it," he said.
"We need to be careful that we don't overreach with whatever suggestions we make in comment letters and whatever suggestions the SEC adopts," Green said. "We don't want to put an undue burden on the good participants in the market. Because that would be like suffering a hangover for a party you didn't attend."
