An SEC report on the municipal securities market has suggested legislation for Congress to consider to provide the Commission with authority to establish improved disclosures and practices in the municipal securities market. The legislation would authorize the Commission to require that municipal issuers prepare and disseminate official statements and disclosure during the outstanding term of the securities, including timeframes, frequency for such dissemination and minimum disclosure requirements, including financial statements and other financial and operating information, and provide enforcement tools.
The SEC assured that this legislative approach would not entail any repeal or modification to the existing proscriptions on the SEC or the MSRB requiring any presale filing of disclosure documents, known as the Tower Amendment. Nor would this approach involve elimination of the exemptions for municipal securities under Section 3(a)(2) of the Securities Act or the exemptions under the Exchange Act. This legislative approach, however, would meaningfully enhance disclosure practices by municipal issuers and could be accomplished in a short period of time.
The report also proposes legislation to amend the municipal securities exemptions in the 1933 and 1934 Acts to eliminate the availability of such exemptions to conduit borrowers who are not municipal entities under Section 3(a)(2) of the Securities Act. Currently, conduit borrowers, those non-municipal entities receiving proceeds from municipal securities offerings, may be subject to the Securities Act or Exchange Act registration or disclosure requirements because they may not be considered to be offering their own securities at the time of the municipal securities offering.
According to the SEC, it is important that investors have information about the entities that are responsible for the monies necessary to make payments on municipal securities in order to be able to assess their investments. This is especially true in light of the relatively high default rate of conduit bonds. This approach would not eliminate other available exemptions, such as those for nonprofit entities under Section 3(a)(4) of the Securities Act and other exemptions that are available to corporate issuers, such as the private offering exemption under Section 4(a)(2) of the Securities Act, without differentiation based on the size of the financing due to the continuing availability of other exemptions, including those available for small businesses, private offerings, and non-profit entities that take into account different types of offerings and issuers.
Financial Statements of Municipal Issuers
The proposed legislation would also authorize the Commission to establish the form and content of financial statements for municipal issuers who issue municipal securities, including the authority to designate and oversee a private-sector body as the GAAP standard setter for municipal issuer financial statements. The Commission currently does not have authority to establish the form and content of financial statements of municipal securities issuers that are used in connection with primary offerings of municipal securities or provided on an ongoing basis in connection with outstanding municipal securities. Moreover, the Commission does not have direct authority over the standard setter for those financial statements. This legislative authorization would be for purposes of the federal securities laws only, thereby allowing municipal issuers to continue to comply with applicable state accounting principles in the preparation of their financial statements.
Congress is also asked to authorize the Commission as it deems appropriate, to require municipal securities issuers to have their financial statements audited by an independent auditor or a state auditor. The legislation should also provide a safe harbor from private liability for forward-looking statements of repeat municipal issuers who are subject to and current in their ongoing disclosure obligations that satisfy certain conditions, including appropriate risk disclosure relating to such forward-looking statements, and if projections are provided disclosure of significant assumptions underlying such projections.
Currently, municipal issuers, as any other issuer of securities, can rely on the judicially established bespeaks caution doctrine when providing forward-looking information. Despite the existence of this doctrine, some municipal issuers have expressed continuing concerns with respect to the provision of forward-looking information in the municipal securities market. In the SEC’s view, this safe harbor would encourage municipal issuers to provide forward-looking information and would be available only to those municipal issuers that provide ongoing public disclosures and provide such information on a current and timely basis. The proposed safe harbor would be similar to the Private Securities Litigation Reform Act safe harbor for reporting public companies and would apply only to private rights of action for antifraud violations.
IRS-SEC Information Sharing
The proposed legislation should permit the Internal Revenue Service to share with the SEC information that it obtains from returns, audits, and examinations related to municipal securities offerings in appropriate instances and with the necessary associated safeguards, particularly in instances of suspected securities fraud. Section 6103 of the Code does not permit the IRS to disclose return information to the SEC and Commission staff in connection with civil enforcement of the securities laws.
If Congress were to allow the IRS to share with the SEC in appropriate instances information it obtains from returns, audits, and examinations, noted the report, enforcement actions relating to municipal securities would be more consistent, comprehensive, and timely. Furthermore, it would promote the efficient use of limited resources and improve compliance by participants in the municipal securities market.
In the past, IRS officials have publicly acknowledged the value of such increased information sharing, should Congress choose to pass the necessary legislation. Moreover, this change would be consistent with the recent guidelines prepared by the GAO to assist Congress in evaluating proposed exceptions to Section 6103.
Finally, legislation should also provide a mechanism to enforce compliance with continuing disclosure agreements and other obligations of municipal issuers to protect municipal securities bondholders and authorize the SEC to require trustees or other entities to enforce the terms of continuing disclosure agreements. The Commission does not currently have authority to enforce issuer compliance with continuing disclosure agreements that are provided as a condition to an underwriting of municipal securities subject to Rule 15c2-12, and no entity is required to enforce the terms of continuing disclosure agreements.