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Cox: SEC to Propose New Disclosure Rules On Municipal Bonds


The Securities and Exchange Commission plans to propose as early as the end of the month rules that would enhance municipal disclosure, SEC Chairman Christopher Cox said in an interview.

The proposals will be aimed at implementing some of the municipal securities initiatives outlined in a 2007 white paper that can be accomplished without congressional authorization, Cox said. They would also come on top of rule changes the Commission proposed in July to establish a central disclosure repository called Electronic Municipal Market Access, or EMMA, that will be run by the Municipal Securities Rulemaking Board.

Cox declined to outline the specific proposals, saying he is still working on them with the commissioners and staff.

"The theme of our proposals has been amply laid out in speeches and testimony the past few years," Cox said, speaking in an interview in his expansive 10th floor SEC office overlooking the U.S. Capitol. "We will, of course, be limited to those things that we can accomplish with our existing regulatory authority."

Cox has sought to boost municipal accounting and disclosure through a direct but limited regulatory regime that would make municipal disclosure more like corporate disclosure and require issuers to adhere to generally accepted accounting standards as established by the Governmental Accounting Standards Board, among other things.

But the main impediment to direct SEC regulation on issuers is the 1975 Tower Amendment, which restricts the Commission as well as the Municipal Securities Rulemaking Board from directly or indirectly requiring muni issuers to file documents with them before their securities are sold.

Congress added the amendment, which was sponsored by the late Sen. John Tower, a Texas Republican, to the Securities Exchange Act of 1934, and as a result, the Commission places disclosure requirements and burdens on the underwriters of municipal bonds, rather than issuers.

Still, market participants said the SEC has a number of options for enhancing issuer disclosure indirectly, by broadly interpreting its anti-fraud authority tied to the sale municipal securities.

"Without congressional action, it is really hard for them to increase federal oversight over issuers of municipal bonds," said one lawyer who did not want to be identified. "But having said that, there are a number of rulemaking initiatives they can take, under the antifraud provisions, to pin issuers down and say, 'As a means to prevent fraud in the offering and sale of municipal bonds, issuers will do the following.'"

Another attorney, who also requested anonymity, speculated the Commission might boost the frequency of municipal disclosure by amending the section of its Rule 15c2-12 that prohibits a broker/dealer from underwriting a muni transaction unless the issuer has agreed to disclose annual financial and operating information. Specifically, the SEC could amend the rule to require not just annual, but quarterly disclosures.

Meanwhile, Cox said the turmoil in the municipal market during the past year, in particular the auction-rate securities scandals and the possibility that Jefferson County, Ala., might have to file for bankruptcy, has only served to increase the urgency of his initiatives. He predicted that lawmakers will support them, while tacitly acknowledging that they had been slow to do so up until now.

"A great deal has happened in the markets in the past year," he said. "If any more evidence were needed that this affects markets in a serious way and touches millions of real investors, events have certainly provided them."

When Cox unveiled the initiatives last summer in a speech and subsequent white paper that he sent to Congress, they were received with only tepid support from market participants. Issuers roundly rejected them as unduly burdensome while Democratic lawmakers, including House Financial Services Committee Chairman Rep. Barney Frank, (D-Mass.), said they were unneeded.

Cox is set to testify on the initiatives before Frank's committee on Sept. 23 at a hearing being held primarily at the request of Rep. Spencer Bachus, the committee's ranking Republican, whose district includes Jefferson County. Cox said he has spoken with Alabama Governor Bob Riley, and "is trying to assist in assuring they [the county] have the best financial advisers."

Cox said that Jefferson County's problems illustrate two "nearly endemic problems" in municipal finance: "It is simultaneously the case that unsuitable investments might be pushed on to municipal issuers, and that municipal issuers have failed to place responsibility for multibillion-dollar financings in the hands of professionally expert, technically competent people.

But, he added, the Tower Amendment "stands athwart" of the SEC's efforts to address a range of issues because the Commission's direct authority extends only to broker/dealers. The SEC can only "pick up the pieces when it's too late for investors," Cox said. "Change is desperately needed there." He said the Tower Amendment may only need to be altered, not fully repealed, to better equip the SEC.