Participants in the municipal securities market should take particular interest in the appointment of Elisse B. Walter as chair of the SEC. Her close association with regulation of the municipal securities market makes it likely that actions directed at the market will be a high priority for the agency.
Ms. Walter was installed as chair on December 14, 2012, pursuant to presidential appointment. She has been a commissioner since 2008 and most notably led the two-year examination of the municipal securities market that resulted in the July 31, 2012 publication of a comprehensive “Report on the Municipal Securities Market” (Report).
The SEC’s examination of the municipal securities market was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Report focused on two primary areas of concern: disclosure practices and overall market structure. The Report also included recommendations for best practices and other initiatives to improve the security and stability of the municipal securities market.
Market participants should watch closely the actions of the SEC and may anticipate agency actions that are directed at the quality of disclosure or the practices of the municipal securities market.
In light of Ms. Walter’s appointment, a review of the Report’s recommendations is timely.
Important Aspects of the Report
As already mentioned, the Report focused on disclosure practices and overall market structure. Several of the Report’s recommendations would require authorization from the U.S. Congress; others could be implemented by agency action.
The Report regarded the limited statutory regime for municipal securities regulation as a limitation on the SEC’s investor protection efforts. The Report proposed legislative changes to improve disclosures to investors, including the following:
The Report also discussed possible actions the SEC could take under existing authority (that is, without further congressional action). Those actions included updating interpretive guidance and working with the MSRB to strengthen the MSRB rules. Most important, they included multiple possible amendments to Rule 15c2-12, such as:
The Report also noted that voluntary industry initiatives would help improve disclosure — not just the content of disclosure by industry sector but also including issuer practices.
Focus on Conduit Borrowers
The Report’s focus on conduit borrowers is particularly notable. Conduit borrowers (which may include for-profit companies or nonprofit entities) access the market through municipal securities issuers. In such cases, the companies often benefit from the exemption of municipal securities under Section 3(a)(2) of the Securities Act from the requirement that a securities offering be registered with the SEC and the requirement for periodic reporting to the SEC.
The Report noted that conduit borrower bankruptcies or defaults have left investors either empty-handed or receiving pennies on the dollar. This prompted the SEC to repeat its recommendation — which has been made since at least the SEC’s 1994 statement regarding disclosure obligations of municipal securities issuers and others (SEC Release No. 33,741) — that conduit borrowers should comply with the SEC’s disclosure rules for public companies.
Most notably, as it relates to conduit borrowers, the Report made the following recommendations:
Recent Municipal Securities Market Measures
Any initiative by the SEC would build on a recent, and perhaps accelerating, trend of heightened scrutiny of the municipal securities market and increased disclosure requirements. Here are selected milestones concerning market transparency and disclosure.
All these developments should be considered in the context of the recent global financial crisis affecting the financial institutions and the economic recession, both of which have predictably resulted in political attention to the transparency and adequacy of disclosure in the municipal market place, which may lead to more substantial regulatory and statutory protection for investors and consumers beyond those described in this Alert.
Market participants should watch closely the actions of the SEC and should anticipate a continuation of agency efforts directed at the quality of disclosure and regulatory scrutiny of the municipal securities market.
Should you be interested in reviewing a copy of the Report, it currently is available at the SEC’s Web site: http://sec.gov/news/studies/2012/munireport073112.pdf.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:
Heidi H. Jeffery
Michael G. Bailey
David Y. Bannard
Laura L. Bilas
Chauncey W. Lever, Jr.
Emily F. Magee
David B. Ryan