WASHINGTON -- The House Energy and Commerce Committee announced yesterday that it is launching an investigation of the municipal bond market to determine if federal regulation should be tightened and if the so-called Tower amendment should be repealed.
The probe, started in response to the recent scandals over political influence peddling involving bond deals in New Jersey and New York City, was announced in a three-page letter to Mary Schapiro, acting chairman of the Securities and Exchange Commission; Christopher Taylor, executive director of the Municipal Securities Rulemaking Board; and Joseph Hardiman, president of the National Association of Securities Dealers.
The letter, signed by Rep. John Dingell, D-Mich., chairman of the full committee, and Rep. Edward J. Markey, chairman of the panel's subcommittee that has jurisdiction over securities, asked the three regulatory groups to investigate the current regulation of the market in light of the scandals, along with concerns over the scope of voluntary secondary market disclosure.
The letter asks the three regulatory groups to submit reports to the committee within 45 days on what regulatory "or other steps" they have taken or intend to take to address the problems.
Warning that it is "in the public interest that we act promptly in order to preserve the integrity of this marketplace," the letter says the telecommunications and finance subcommittee would schedule hearings after the reports are received.
"We are looking into the facts and circumstances surrounding the recent New Jersey Turnpike refunding scandal and the adequacy of the current laws and regulations applicable to the issuance and sale of municipal securities," the letter says.
Dingell and Markey asked the regulators to take a "comprehensive look at the present scheme of regulation in light of the current scandals involving alleged illegal payoffs, influence pedding, conflicts of interest, and questionable sales practices, along with concerns over the scope and degree of voluntary secondary market disclosure."
The chairman said that as part of their review, regulators should advise them "on the need to repeal, in whole or in part, the so-called Tower amendment of the Securities Exchange Act of 1934, which prohibits the commission and the MSRB from requiring issuers to file disclosure documents with either entity to register the sale of securities, and which prohibits the MSRB from requiring disclosure documents to be sent to it or to investors."
They also asked the three regulatory organizations to supply statistics for the past 10 years on enforcement cases and disciplnary actions involving municipal securities.
And they asked for recommendations, if there been or are any, for "enhancing the structure and/or authorities of the MSRB."
Schapiro said in tham telephone interview yesterday that her agency is prepared to act if the MSRB does not take firm steps in response to the growing political contributions scandal in the municipal market.
Referring to the publicity about possible political influence peddling involving bond deals, Schapiro said the SEC "has a lot of concern about the integrity of the municipal market not being impaired" and "is studying the appropriate response."
"My personal preference would be to see the MSRB take action," Schapiro said. "But I also believe the SEC should help give them some backbone and be prepared to act if they don't."
SEC member Richard Roberts yesterday outlined steps he said the MSRB could take to address the political contributions issue, including requiring underwriters to report political contributions when they deliver official statementss to the MSRB.
The board could make such information available through its central repository, Roberts said in a speech to a regional meeting of the Public Securities Association in San Francisco.
Meanwhile, Arthur Levitt Jr., President Clinton's nominee to be SEC chairman, said in a telephone interview yesterday that he would not comment on the issue until after his confirmation hearings in the Senate.
"Out of courtesy to the Senate, I would prefer to defer my response to this very important issue until after my confirmation hearings," the former chairman of the American Stock Exchange said.
But Washington sources familiar with Levitt's background predicted he will give the issue his top attention once he is confirmed. "[Levitt's] history in city government and experience in various state and federal commissions would suggest that he would be very concerned about the linkage between political contributions and municipal finance," one source said.
Among his activities, Levitt chairs the New York City Economic Development Corp. His father, Arthur Levitt Sr., was comptroller of New York State.
The MSRB's Rule G-36 requires underwriters to file a final official statement within 10 business days after the final agreement to purchase, offer or sell securities, Roberts said. "Thus informationk regarding political contributions could be available to investors while reviewing the disclosure documents," he said.
He conceded there are potential loopholes in his suggestion that underwriters report contributions when they deliver official statements to the MSRB's Municipal Securities Information Library system. "It is possible for underwriters to funnel political contributions to municipal officials through employees or their spouses," he said.
Roberts said, however, that the board could require a "firm to include in its disclosure materials information about employee or employee-directed contributions that specifically identify the underwriter in connection with the contribution."
"This will enable underwriters to warn as they are being hounded for contributions that the contributions are going to be reported," Roberts said in a telephone interview yesterday.
Other alternatives, he said, could include the SEC simply amending its own municipal disclosure Rule 15c2-12 to require underwriters to disclose contributions when they deliver official statements. But he said it is "preferable to defer to the MSRB," at least "for a reasonable time."
Roberts also said the MSRB may also want to leave regulation of political contributions to the states. "While I am not sure that I agree with such an approach, that is an alternative," he said.
He questioned Maine Treasurer Sam Shapiro's recent recommendation that the MSRB institute a nationwide ban on contributions to election campaigns from municipal bond firms. He said such a ban may be viewed as unconstitutional by courts and is "rather impractical."
Roberts said he recognizes that dealers are weary of bearing the brunt of the regulatory burden in the municipal market. He said he understands that there is already growing sentiment among dealers in favor of repeal of the Tower amendment.
He said, "disenchantment" with the Tower amendment was partialy reflected in comments arising from the most recent attempt by the East Baton Rouge Mortgage Finance Authority to refund certain housing bonds.
"While I am not prepared at the present to join those seeking legislation to repeal the Tower amendment, my reluctance to join the fray is subject to reconsideration over time."
Roberts told a House subcommittee last week that he "would be interested in pursuing with the subcommittee some limited repeal of Tower" if secondary market disclosure does not continue to improve in the municipal market.
In an interview after his speech yesterday and after learning about the Dingelll and Markey letter, Roberts said, "That's good, I view that as a positive" to have the various groups study the issue. Richard Lehmann, president of the Bond Investors Association in Miami Lakes, Fla., disagreed with Roberts' idea of requiring underwriters to report contributions when they deliver official statements to the MSRB.
"It's not the way to go," he said. "Everyone keeps dropping on underwriters here. They are just reacting to a situation that is pervasive in politics. [Also], there are too many ways of getting around that. This is something between the public and elected officials."
Lechmann said the answer is for states to pass laws requiring issuers to justify why they chose not to use competitive bidding, which is far less likely than negotiated deals to trigger heavy contribution activity.
"It would be pretty hard to vote against such a cause since it's sort of like apple pie. Who can raise valid objections to a sunlight piece of legislation?" he said.