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SEC report makes case for muni oversight, despite opposition: the SEC completed its review of the municipal securities market and released its report, which makes more than a dozen recommendations for legislative and regulatory changes.

The Securities and Exchange Commission (SEC) completed its review of the municipal securities market and released its report on July 31, 2012. The report, titled SEC: Report on the Municipal Securities Market, makes more than a dozen recommendations for legislative and regulatory changes. (1)

The SEC's report follows more than two years of work, three field hearings, and meetings with numerous market participants. GFOA Past President Ed Harrington testified at the San Francisco, California, hearing, and GFOA President-elect Tim Firestine testified at the Washington, D.C., hearing. Harrington and Firestine both explained the plethora of financial information already available to investors and the public about government finances and budgeting. GFOA staff and leadership also met frequently with SEC Commissioner Elise Walter, who led the review, as well as the SEC Chairman Mary Schapiro and SEC staff, explaining the vast amount of financial information public-sector entities already make available to the marketplace--much more than the corporate sector provides.

Despite these efforts, the report appears to maintain the SEC's position that the information available to municipal securities investors is too little and too late.

The GFOA remains strongly opposed to any efforts that would give the SEC oversight authority over issuers of municipal securities; allow the agency to develop the timing, content, and frequency of disclosure information; mandate generally accepted accounting principles for issuers of municipal debt; or, most striking in the report, set standards on the financial information developed and presented by governments. The GFOA's long-standing public policies state that the federal government should not mandate or otherwise influence these practices. Additionally, GFOA best practices, policies, and certificate and award programs guide issuers to robust financial reporting and disclosure policies and practices. This fall, the GFOA Executive Board and Committee on Governmental Debt Management will develop appropriate responses to the SEC and Congress.

Below is an overview of the SEC report's legislative and regulatory recommendations, followed by GFOA positions.


Except for specific anti-fraud provisions, current law prohibits the SEC from directly regulating state and local governments that issue debt. Over the past 20 years, the SEC has developed rules that effectively impose indirect standards on municipal bond issuers by requiring that underwriters cannot purchase bonds unless an official statement accompanies the new issuance and that the issuer has a contract stating that it will provide ongoing financial information for the lifetime of the bonds. The SEC believes the market would work better if it could directly regulate issuers of municipal securities and the required content of their disclosure. The following SEC proposals would require Congress to act.

1. The SEC should have the authority to directly regulate issuers of municipal securities, set timelines and content requirements, and have enforcement capabilities over issuers. The SEC would directly--rather than indirectly, as it does now--require municipal issuers to provide official statements and ongoing disclosures related to a bond issuance. Furthermore, the SEC would have authority to set specific timelines, frequency of information disclosure, and content of disclosures and financial statements and other financial and operating information. The SEC would also have the authority to create enforcement mechanisms over state and local governments.

The report notes that the SEC would not necessarily want to dictate detailed requirements for an issuer's disclosure and financial information, but instead would develop a platform using a "principles-based" approach. The report also says the SEC is not seeking to have municipal securities issuers register with the SEC, as issuers of corporate securities must do. Additionally, the report indicates that this recommendation may be "tiered," based on the issuer's size and frequency.

The GFOA strongly opposes any efforts by the SEC to directly regulate issuers or set disclosure standards. The GFOA opposes SEC involvement in setting standards for the financial and operating information developed by state and local governments. Additionally, GFOA best practices and awards programs, which were discussed favorably in the SEC paper, encourage governments to use generally accepted accounting principles as prescribed by GASB, use their comprehensive annual financial report (CAFR) for ongoing disclosure requirements, complete their CAFR within 180 days of the end of their fiscal year, and make interim financial information available to the public.

2. Allow the SEC to establish form and content of financial statements for entities that issue municipal securities. The SEC would be able to recognize the rules of a national standard-setting body (i.e., the GASB) for purposes of federal securities laws and impose those standards on issuers of municipal securities giving the SEC attendant authority over such body.

The GFOA remains steadfast in its opposition to any SEC or federal government interference with the GASB, the establishment of financial and accounting standards for state and local governments, and the form and content of issuer's financial information used for disclosure purposes. The authority to set accounting standards rests with the states, which established the GASB more than 25 years ago to achieve a streamlined and uniform accounting platform for state and local governments. Federal authority over the GASB is a violation of federalism and will be vigorously fought by the GFOA and other state and local government organizations.

3. The SEC should be authorized to require issuers of municipal securities to have their financial statements audited by an independent auditor or a state auditor. The recommendation also notes the possibility of a scaled or tiered approach to requiring audits, beginning with large governments.

The GFOA encourages governments to have their financial information independently audited. However, the GFOA opposes SEC action to mandate an audit requirement, as the SEC should not dictate any state and local government accounting or auditing standards.

4. The SEC would provide a safe harbor from private liability for governments using projections and forward-looking statements in their disclosure documents. Governments and legal counsel have expressed possible legal risks when a government uses projections and forward-looking statements in financial documents that are public, as well as documents that are posted on a government's website. The SEC proposal seeks to put to rest any liability concerns about using projections and forward-looking statements in a government's financial documents.

The GFOA supports initiatives that would protect state and local governments from any liability when they use projections in their financial and budget documents.

5. Permit the Internal Revenue Service to share with the SEC information found through returns, audits, and examinations that may be appropriate in relation to a municipal securities offering. The GFOA supports enforcing laws that rid the market of fraudulent behavior. However, the GFOA is concerned by the lack of specifics about how such information could be shared and obtained between agencies.

6. Develop a disclosure enforcement mechanism, possibly though requiring trustees to enforce the issuer's continuing disclosure agreement. The report notes that without having authority to establish an appropriate enforcement mechanism, the proposals to implement a new federally mandated disclosure regime would fall flat. Although the paper does not specifically cite how an enforcement mechanism would work, it notes that such authority is needed in order to protect bondholders and could possibly be implemented by trustees.

The GFOA opposes giving the SEC authority over state and local governments. It also is unclear how an enforcement mechanism would work and whether trustees are the appropriate professionals to implement any type of enforcement actions.

7. The securities laws exemption would be repealed for for-profit private sector conduit borrowers. Currently, under certain circumstances, companies and other entities issue bonds through a separate issuer to finance projects that benefit private-sector entities. This recommendation would authorize the SEC to impose corporate-style disclosure standards on these issuers. The report specifically states that it is not recommending that corporate-style reporting requirements be placed on non-profit conduit borrowers (e.g., health care and higher education authorities).

The GFOA supports initiatives that eliminate preferences for bonds that exclusively benefit the private sector.


Currently, the only SEC rules that directly apply to issuers of municipal securities are the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. As noted above, all other rulemaking over issuers of municipal securities is done indirectly by imposing standards on underwriters. SEC Rule 15c2-12 specifically lays out those requirements, and in its recommendations, the report discusses possible changes to this rule.

1. The SEC could update its interpretive guidance on SEC Rule 15c2-12 to identify areas where improvement is needed and set the tone for the type of disclosure standards needed in the marketplace. Interpretive guidance on Rule 15c2-12 has not been updated since 1995. The guidance serves as a roadmap about what the market should expect to see from issuers and other market participants who must comply with the rule and meet certain disclosure standards.

Updated interpretative guidance could change disclosure requirements because of the SEC's regulatory authority to interpret antifraud standards. This could enable the SEC to increase issuer disclosure standards and implement its campaign to place additional requirements on state and local governments, without congressional action. The GFOA will closely monitor any SEC activity that would impose greater disclosure burdens on state and local governments.

2. The SEC could make specific changes to Rule 15c2-12, thus creating more disclosure standards on issuers. The SEC could amend the rule, and the paper suggests doing so as follows:

a. Require the Official Statement to include information about the terms of the offering--distribution plan, if there is a retail order period, and the issue price in the initial issuance.

b. Require more specific items in the official statement and continuing disclosure, including new material event notices related to issuance of new debt, risks of municipal securities, and information about underlying obligors.

c. Create a condition that issuers must have disclosure policies and procedures in place and provide a method for addressing non-compliance issues.

d. Improve the accessibility of disclosures by including a summary of the official statements and increased use of issuer websites.

The GFOA would need to carefully review any suggested changes to the rule that could impose new standards on state and local governments. The GFOA recommends that governments develop and implement disclosure policies and procedures, but does not believe that the SEC should mandate such practices.

3. The SEC could work with the MSRB to strengthen MSRB rules, including those to enhance EMMA. The SEC could work with the Municipal Securities Rulemaking Board (MSRB) to develop new rules that may address various market practices including suitability standards for the types of financial products that could be sold to state and local governments. The SEC also recommends possible ways to enhance the MSRB's Electronic Municipal Market Access (EMMA) system, including requiring additional data and information from issuers and the marketplace to be posted in the system.

The GFOA has commented on the possibility of having the MSRB look at developing standards that protect state and local governments from being sold financial products that are not suitable for them. Any changes to EMMA or any new required submissions would need to be carefully reviewed before determining if there is support for these changes.

4. The SEC would encourage market participants to follow and adopt new best practices related to disclosure and market practices. The SEC identifies seven areas where best disclosure would be useful.

The GFOA currently has best practices (2) covering each of the areas for which the report indicates that best practices should be developed and followed: development of disclosure policies and procedures, and ongoing training; timeliness of financial information provided to marketplace; availability of interim financial information; use of issuer website; presentation of and access to information in disclosure documents; use of derivatives; educational efforts for issuer official, investors, and other market participants.

5. SEC could hold conferences and forums with market participants and academics to discuss relevant issues.

The SEC report also makes multiple recommendations about ways of improving bond pricing in the primary and secondary market. The GFOA supports initiatives to improve price transparency. Such improvements would assist issuers in the pricing and subsequent trading of their bonds and would be especially helpful to retail investors, who could more readily access and review information. I


(1.) The report is available at

(2.) GFOA best practices: Debt Management Policy, Maintaining an Investor Relations Program, Understanding Your Secondary Market Disclosure Obligations, Using the CAFR to Meet SEC Requirements for Periodic Disclosure, Using your Web Site for Disclosure, Web Site Presentation of Official Financial Information.

SUSAN GAFFNEY is the director of the GFOA's Federal Liaison Center in Washington, D.C.
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Title Annotation:Federal Focus
Author:Gaffney, Susan
Publication:Government Finance Review
Date:Oct 1, 2012
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