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From Securities Regulation Daily, February 13, 2015

Time to end second-class treatment of municipal securities investors, Aguilar says

By John Filar Atwood

Calling the municipal securities market “excessively opaque, illiquid and decentralized,” SEC Commissioner Luis Aguilar proposed several reforms that he believes will help ensure the existence of a vibrant municipal bond market. The municipal securities market has been subject to far less regulation and transparency than other segments of the U.S. capital markets, he noted, affording municipal investors second-class treatment under current law. Some initiatives are underway to make the market fairer, he acknowledged, but he believes more can be done.

In a newly released statement on the fairness of the municipal securities market, Aguilar cited as steps in the right direction the Municipal Securities Rulemaking Board’s (MSRB) proposed rules to clarify the fiduciary duties of municipal advisers. He also commended the MSRB and the Financial Industry Regulatory Authority for proposing rules on the disclosure of reference price information for same-day principal trades, and to impose a best execution requirement for trades involving retail investors.

Repeal the Tower Amendment. Even with these efforts underway, Aguilar offered several reform proposals of his own starting with the repeal of the Tower Amendment and the exemptions from the registration and disclosure provisions of the Securities Act and the Exchange Act. He said that repealing the Tower Amendment would allow the SEC and the MSRB to require issuers of municipal securities to file disclosure materials for review before offering securities to investors.

However, even without the Tower Amendment, the Commission and the MSRB would lack the authority to determine what information municipal issuers need to disclose, and when they need to disclose it. Consequently, he also recommended that Congress repeal municipal securities’ exemption from the Securities Act’s registration provisions, and from Exchange Act reporting requirements. As an alternative, he said that Congress could leave the exemptions in place, but give the SEC the authority to establish improved disclosure practices in the municipal securities market.

Improve disclosure. If the Commission is given that authority, Aguilar suggested that it consider the National Federation of Municipal Analysts’ (NFMA) recommendations to improve disclosures for newly issued municipal securities. The NFMA identified numerous ways in which municipal issuers can make their initial offering statements for general obligation bonds clearer, more informative, and more comprehensible to investors, he noted.  He cautioned that any new disclosure regime should not needlessly subject municipal issuers to the same registration framework that applies to public companies.

Aguilar said that the statutory changes he suggested are unlikely to get done in the current political climate, so he recommended that the SEC pursue other avenues to improve municipal issuers’ disclosures. One change that would have an immediate impact is the revision of Exchange Act Rule 15c2-12, he said. He believes the Commission should require timely disclosure of bank loans and similar debts that could impair the rights of holders of municipal securities, and should consider amending the rule to require issuers to sign up for automatic email notifications regarding upcoming deadlines for continuing disclosures.

Update interpretive guidance. Aguilar also recommended that the SEC update its interpretive guidance regarding disclosure obligations under Rule 15c2-12. The last update was in 1994. He said that the updated guidance should provide the staff’s views on areas in which disclosure practices could generally be improved. This could include guidance on when the re-marketing of variable rate demand obligation securities constitutes an initial offering, the need for robust disclosure about the underlying obligor, even in offerings that are bolstered by credit enhancement, and the importance of key disclosures, such as those relating to risks and conflicts of interest.

Improve price transparency. Another reform proposal offered by Aguilar is the improvement of pre-trade price transparency. He believes that the lack of pre-trade price transparency perpetuates the high level of markups and other transaction costs that individual investors incur, and prevents individual investors from assessing the fairness of the prices they are quoted by their dealers. It also complicates broker-dealers’ efforts to comply with their fair pricing and best execution obligations, he said.

He noted that a 2012 Commission report identified steps the SEC could take to level the playing field for individual investors and give them the data they need in order to make informed decisions about their investments. He believes the Commission staff and the MSRB should seek public comment on the recommendations and develop proposed rules for the Commission’s consideration.

Aguilar said that regulators should continue to work to improve post-trade price transparency. He noted that in recent years, the MSRB has leveraged its EMMA system to vastly improve post-trade price transparency for municipal securities. He recommended that the MSRB continue to enhance the functionality of its EMMA website, such as by providing easier-to-read daily trade summaries and graphs that allow users to visualize how their trade prices compare to others for the same security.

Enhance information sharing. Finally, Aguilar said that the municipal securities market could be improved through enhanced information sharing among regulators. He believes that Congress should revise the tax code to allow the IRS to share with the Commission information the IRS obtains from returns, audits, and examinations when that information concerns potential fraud in the offer or sale of municipal securities. This information could allow the Commission to identify and stop instances of fraud earlier, thereby minimizing potential investor losses, he said.

MainStory: TopStory SECNewsSpeeches MunicipalSecuritiesNews

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