WASHINGTON -- The Securities and Exchange Commission is considering whether it needs to take further action to increase municipal bond disclosure or its regulatory authority over municipal issuers, an SEC spokesman said yesterday.
"We're looking at a variety of options, including legislative and regulatory options, and we will be holding discussions with a number of people, including Congressman [Christopher] Cox," the spokesman said.
SEC chairman Arthur Levitt appeared to echo those statements yesterday when he said at a town hall meeting in Los Angeles that he wants more disclosure in the municipal market.
Levitt said that while the commission and market participants have made strides toward increased disclosure in recent months, they can go "a lot further."
"We haven't brought the kind of disclosure that I think is necessary," Levitt said.
Rep. Cox, the Republican who represents Orange County, Calif., said on Tuesday that he plans to introduce legislation next year that would subject municipal bond issuers to the same disclosure requirements as corporate issuers, possibly including registration.
Cox, a lawyer who formerly directed the corporate finance department at the law firm of Latham & Watkins in Newport Beach, Calif., contends that if Orange County had been subject to the same disclosure requirements as corporate issuers, investors would have been aware of its risky investment strategies and resulting financial problems sooner.
The county filed for bankruptcy last week, stunning bondholders and roughly 180 municipalities and public authorities that put funds in the county's multibillion dollar investment pool.
Most municipal market participants said yesterday that municipal issuers could not be subjected to the same disclosure requirements as corporate issuers unless the so-called Tower Amendment to the Securities and Exchange Act of 1934 is repealed.
The controversial Tower amendment, which was added to the act when the Municipal Securities Rulemaking Board was created in 1975, prohibits the SEC and MSRB from adopting rules requiring municipal issuers to file registration documents before their offerings are made.
In addition, municipal bonds are currently exempted from registration and reporting requirements under the securities laws even though they are covered by the securities laws' antifraud provisions on disclosure. Those exemptions would have to be removed or modified, sources said.
Corporations are required to file registration statements for new offerings of stocks and bonds with the SEC under the Securities Act of 1933, the sources said. The commission must declare the registration statements effective before the offerings take place. Corporations must also file quarterly and annual financial reports under the Securities and Exchange Act of 1934.
Cox's call for new municipal disclosure requirements drew mixed reactions from municipal market participants yesterday. Some lobbyists said they were not surprised, but most market participants were concerned that Cox may be reacting too abruptly without being aware that new disclosure rules have been adopted for the municipal market in recent months.
"It's important that people on Capitol Hill who are reacting to this have a complete and full understanding of all of the municipal regulation that does apply to the market," said Micah Green, executive vice president of the Public Securities Association.
"One should not presume that we're starting from ground zero on municipal market regulation. There's been tremendous development of the regulatory structure for the municipal securities market over the last two years and that should not be ignored because it's just now taking affect," Green said.
The SEC adopted tough new secondary market disclosure rules for the municipal market last month. Those rules, among other things, bar brokerdealers from underwriting bonds as of July 3 1995 unless they have "reasonably determined" that the issuer has agreed in writing to provide ongoing disclosure of annual financial information and notices of material events that could affect their bonds.
The SEC also issued an interpretative release last March that reminded municipal issuers and other market participants that they have existing disclosure obligations under the antifraud provisions of the securities laws. The release recommended disclosure practices for issuers and other market participants who wanted to avoid running afoul of the antifraud provisions.
The PSA's Green said the Orange County situation "will be a test of the sufficiency" of the municipal market's disclosure rules and that the regulators and lawmakers may find the issues raised by Orange County "are fully addressed" by those rules.
A spokesman for Rep. Edward Markey, D-Mass., said that "while it's certainly worthwhile to examine the recently adopted rules in light of what happened in Orange County, our preliminary view is that those rules were crafted precisely to deal with the types of problems that we've seen come up in Orange County." Markey currently chairs the House Energy and Commerce subcommittee on telecommunications and finance, but will become its ranking minority member next year.
"I think legislation would be a mistake," said Jeff Green, general counsel of the The Port Authority of New York and New Jersey. "I think it's important to give the new SEC rules and the interpretative release an opportunity to work, which means they must be understood by issuers and implemented by the market."
Andrew Kintzinger, the president of the National Association of Bond Lawyers, said Orange County should give issuers a "heightened sensitivity" to their investment strategy and portfolio management and how that affects their bond issues.
At the same time, Kintzinger, a lawyer with Briggs and Morgan in Minneapolis, said the county's situation "raises questions for bond counsel about their due diligence responsibilities to investigate the financial health of an issuer. It also raises disclosure concerns for bond counsel about how to inform the market of material events arising from an issuer's investment strategy and portfolio performance."
Frank Shafroth, director of policy and federal relations for the National League of Cities, said Cox's call for more disclosure rules for the municipal market is at odds with the House Republican leadership's Contract With America which lays out an agenda for the start of the congressional session next year.
"The Contract With America talks about not imposing more mandates and not imposing more requirements on state and local governments," said Shafroth. "It just seems to me that what Mr. Cox is saying is inconsistent with that."
Shafroth and other market participants said Orange County voters had information that their treasurer appeared to be engaging in risky investment strategies and reelected him anyway.