For almost 20 years, the Tower Amendment has blocked a healthy, full-fledged development of the municipal bond market, and we're happy to see that the incoming chairman of the House Banking Committee is going to introduce legislation on Jan. 4 to repeal it.
The Tower Amendment, which was added in 1975 to the Securities Exchange Act of 1934, bars the Securities and Exchange Commission and the Municipal Securities Rulemaking Board from requiring municipal bond issuers to register their bonds. So the authorities have had to back into the matter, requiring underwriters to distribute official statements describing unregistered municipal bonds. The system is a confusing Rube Goldberg contraption, and it has resulted in serious information gaps -- as Orange County's bankruptcy proves.
The amendment is named for John Tower, the former senator from Texas who jumped to the defense of states and cities during New York City's financial crisis in 1975. The Republican championed states' rights, and bond issuers weren't eager for the bother and expense of registering their securities. Together they had the clout to prevail in Congress.
Then came the big Washington Public Power Supply System default in 1983. The SEC, after analyzing the matter for five years, changed its rules to require underwriters to obtain and review official statements from bond issuers and then provide them to investors. But it left hazy just what financial information should be put in official statements, and it didn't require annual updates.
This year the commission has proposed requiring annual reports from municipal bond issuers for as long as their bonds are outstanding, but the content of official statements is still left up to the issuers.
A week ago, Rep. Jim Leach, a Republican from Iowa, told a news conference that he planned to introduce a bill on Jan. 4 to repeal Tower. "In democracy," he said, "municipalities ought to lead the way in full disclosure." If Orange County had been subjected to corporate disclosure requirements, its treasurer would have had to disclose his risky investment strategies and the county would never have got into such serious financial trouble, Leach said.
Corporate money funds must mark the value of their assets to market, and that would have helped curb Orange County. So would complete disclosure about the pool's borrowings and derivatives.
So Leach is right. It's time to stop backing into disclosure. Repeal Tower and tell municipal bond issuers what they must divulge. Make states and cities follow tougher rules if they want to borrow in the interstate market, and the information, ultimately, will make the market function better.