Risk & Compliance

SEC Inches Toward More Authority over Munis

Will chairman Cox, before his term ends this year, get his wish to make municipalities follow financial-reporting rules similar to those governing ...
Sarah JohnsonApril 16, 2008

The Securities and Exchange Commission’s announcement last week that the regulator had charged five former San Diego officials with fraud read like all its other enforcement-related press releases.

But the case — stemming from municipal securities offered in 2002 and 2003 that were sold with “false and misleading” information about the city’s financials — carries symbolic weight for the SEC and chairman Christopher Cox in the drive to bolster their authority over the offerings made by states and local governments. During his nearly three-year tenure, Cox has held up San Diego’s financial troubles as a prime example of why federal regulators should be more involved in the $2.4-trillion municipal securities market.

Currently, the commission cannot directly require municipal securities issuers to follow its rules, and its involvement is restricted to anti-fraud authority. Cox’s push to override that limitation, by requiring muni issuers to disclose more and improve governmental accounting, seems to mark a departure for what most people expect from a Republican oft-praised by his party as a conservative.

During a meeting in Los Angeles last summer, Cox touted the SEC sanctions against San Diego for failing to share knowledge of its underfunded pension and health-care liabilities with bond investors. But he also bemoaned how the commission’s role in the case was solely reactive — a rare acknowledgement for the SEC to make in enforcement cases. “We’ve addressed the issues — after the fact. But it’s not enough to punish fraud; we’ve got to work to prevent it,” he said.

In other words, Cox is looking for more regulation, but he needs Congress’s help to do it. He has said that giving the SEC more power, and requiring municipalities to provide more information about their securities, is “a basic common-sense consumer protection that is way overdue.” However, his proposals for fixing the problems in the muni securities market could be viewed as encroaching on states’ rights — one of the main reasons municipalities have been treated different from corporations in the application of securities rules. The securities also used to be held primarily by institutional investors, but should now be subject to the needs of the so-called less financial savvy retail investors; according to the SEC, households own 36 percent of municipal securities directly, or $860.6 billion worth.

The wish list that Cox sent to lawmakers last year called for the SEC to become the overseer of the Government Accounting Standards Board, a role similar to its oversight of the Financial Accounting Standards Board, granted by the Sarbanes-Oxley Act. “To provide investors in municipal securities with access to full, accurate, and timely information like that enjoyed by investors in many other U.S. capital markets, the commission requires expanded authority over the municipal securities market,” Cox wrote.

That request could be met with some trepidation in accounting circles. Last year, the SEC came under fire for adding to its oversight of FASB by insisting that it have a say in board member nominations, in addition to its ability to certify the standard-setter’s budget. The new responsibility — which goes along with its right under Sarbox to designate whatever group it wants to set accounting standards, including itself — brought up the question of how much independence FASB has from interference of political interests.

As it is, not all municipalities are required to follow GASB’s standards. Cox would like to change that, and also to make them subject to securities regulations similar to those governing public companies’ financial reporting standards. However, he isn’t suggesting they be transferred to municipalities “wholesale,” nor is he suggesting that the SEC review their disclosures. “Municipal issuers are themselves governments,” which would negate the right of the commission to review those filings, according to Cox’s 12-page proposal.

At least one item on his list is already in the works. Cox would like municipalities to submit their securities offerings and financial documents to an EDGAR-like system. Last month, the Municipal Securities Rulemaking Board launched EMMA (for Electronic Municipal Market Access), and it will hold official statements for new securities issues and trade price data all in one place. The SEC has to amend one its rules before EMMA can also provide investors with real-time access to disclosures published by muni bond issuers. The commission could consider proposing amendments next month, according to spokesman John Nester.

Still, MSRB has no authority to dictate how quickly or what format muni bond issuers should use to provide their disclosures, notes Lynnette Kelly Hotchkiss, the board’s executive director.

As for Cox’s other proposals, Congress has not yet formally addressed them. At a recent hearing of the House Committee on Financial Services, ranking member Rep. Spencer Bachus (R-Ala.), who supports Cox’s paper, said the committee’s chairman, Rep. Barney Frank, “has agreed” to invite Cox to a hearing to discuss his ideas sometime this year. However, a spokesman for Frank’s office said there is no such meeting planned, at least for the next month. The spokesman for the U.S. Senate Committee on Banking, Housing, and Urban Affairs, which also reportedly received Cox’s proposal, did not return CFO.com’s request for comment.

Even if he does get to promote his ideas to Congress soon, Cox could certainly continue to face an uphill battle over the issue — an effort made more difficult because his tenure at the SEC is expected to end this year. In a letter to Sen. Christopher Dodd, Jeffrey Esser, CEO of the Government Finance Officers Association, called further regulation “needless,” and said it would ultimately cost taxpayers money. The municipal market is secure enough as it is when considering it has a default rate of less than one-tenth of 1 percent, Esser wrote.

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