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.
Conduit Borrowers
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.
Enforcement
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.