WASHINGTON — The Securities and Exchange Commission Wednesday unanimously approved amendments to its Rule 15c2-12 on disclosure that, like the ones proposed in July, will increase the quantity and timeliness of municipal issuers’ continuing disclosures.
Most of the commissioners, however, said that additional improvements must be made, most likely with the help of Congress.
“Although I believe the commission’s regulatory authority of the muni market should be expanded in order to better protect investors and issuers alike, the amendments under consideration Thursday represent an important improvement within our present authority,” SEC Chairman Mary Schapiro said prior to the vote. The amendments to the rule, which are the first since 1994, will go into effect Dec. 1.
The SEC’s approval of the rule changes follow Schapiro’s announcement that the SEC will hold a series of public hearings across the country that will lead to recommendations for specific statutory and regulatory changes to better protect investors. Asked about the hearings, SEC staff told reporters they were still under discussion and that no timing has been set for them yet.
Commissioner Elisse Walter, a Democrat who is spearheading these efforts, hinted at the direction they may take in her remarks Wednesday. She said Congress should reconsider the existing separation between the regulatory functions of the Municipal Securities Rulemaking Board and the examination and enforcement of the MSRB’s rules by the Financial Industry Regulatory Authority.
Walter also said she believes the SEC should leverage its antifraud authority to make additional improvements to the timeliness and quality of disclosures, such as through forthcoming interpretive guidance to address legal ambiguities in 15c2-12, another muni project she is also leading.
“I have a really hard time trying to understand the relative lack of attention being given to this market even though it’s enormous and operates with increasing participation by retail investors,” Walter said. She added that while she is passionate about munis, her concerns about the market keep her up at night.
Luis Aguilar, the other Democrat on the Commission, said Congress should repeal the so-called Tower Amendment, which restricts both the SEC and the MSRB from collecting bond documents prior to issuance, as well as give the SEC authority to directly regulate the market, instead of relying on 15c2-12, which applies only to dealers. Specifically, the rule says a dealer may not underwrite most municipal securities unless the issuer or obligor has contractually agreed to provide certain annual and ongoing disclosures.
Additionally, Aguilar said he is concerned that the timeliness and quality of municipal disclosure remain far behind what is offered to corporate investors. He warned the amendments do not address specific disclosure items that are “highly relevant to the issuer’s financial health, such as an issuer’s exposure to swaps and other derivative products.”
“For example, as we learned through our investigation of bond offerings and swap transactions involving Jefferson County, Ala., swap termination fees of $647 million might have bankrupted that municipality,” Aguilar said, referring to a November settlement between the SEC and JPMorgan. “I think that all municipalities should make information such as this available to investors.”
But Commissioner Troy Paredes, a Republican, urged staff to be mindful of the disproportionate burdens that muni rules can have on small issuers or obligors and, when appropriate, to “eschew a one-size-fits-all” approach.
The SEC made small tweaks to the rule changes from those proposed in July, including adding a provision that would “grandfather” existing variable-rate demand obligations issued prior to Dec. 1 so they remain exempt from the new disclosure requirements.
To capture the possibility that an issuer of Build America Bonds may lose its direct-subsidy payments, the SEC slightly altered the proposal to require that issuers disclose events that may adversely affect a bond’s tax status, including issuance by the Internal Revenue Service of proposed and final decisions about whether their bond’s tax status has changed.