WASHINGTON – The Securities and Exchange Commission should consider obtaining registration and disclosure authority over corporate conduit borrowers in the municipal market, said SEC Commissioner Michael Piwowar.
Piwowar, who noted this was recommended by the SEC's 2012 Report on the Municipal Securities Market, delivered the remarks in a speech on Sept. 7 at the Financial Industry Regulatory Authority's 2016 Fixed Income Conference in New York City.
Piwowar said that while the Tower Amendment, which prohibits the SEC from regulating issuers of municipal debt, has been controversial, it is time to move the debate to beyond whether it should be repealed – an all or nothing approach. Instead, he suggested the SEC consider regulating corporate conduit borrowers because they are like corporations already subject to registration and disclosure requirements. Traditional muni issuers would not be regulated, he added.
"Recent conversations … have led me to consider whether it is time to revisit the reach of the Tower Amendment," Piwowar said. "This approach was recommended in the 2012 muni report, and I believe it is the type of middle ground discussion that we should have as our municipal securities markets continue to evolve."
He noted that Tower "has long generated strong views amongst [the] industry, regulators, and legislators alike" with the debate often coming down to a "binary choice between either repealing it in its entirety or maintaining all of its strict prohibitions." Calls for repeal "typically die quickly" and "some of us at the SEC shudder at the thought of adding over 50,000 new registrants," Piwowar added.
"This simplistic, [binary] view fails to account for the incredibly diverse landscape of municipal borrowers, which includes large state governments, local school districts, and a wide range of conduit borrowers," Piwowar said. "It is worth considering whether each of these entities should be treated the same. For example, many conduit borrowers arguably resemble corporate issuers of debt more than they do municipalities themselves."
Conduit borrowers are corporations and developers as well as nonprofits such as hospitals and universities that issue debt through states, localities or their authorities and then borrow the proceeds for their projects.
The 2012 muni report found that while defaults in the muni market were rare, studies and reports indicated that a majority of the defaults that occurred were related to conduit revenue bonds issued for non-governmental purposes. It also noted that 15 years before the report was released, the SEC had suggested that for-profit conduit borrowers in industrial development financings should be subject to the registration and disclosure provisions in the Securities Act of 1933.
"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 investment," the SEC said in the report. "This is especially true in light of the relatively high default rate of conduit bonds," which represented approximately 70% of all muni bond defaults and have been identified as providing substantially less continuing information than municipal securities not involving conduit borrowers, the commission added.
Piwowar also used his speech to praise FINRA and the Municipal Securities Rulemaking Board for their work toward implementing best execution and markup disclosure rules in the fixed income market. The MSRB's best execution rule became effective in March and the muni self-regulator recently filed for SEC approval of amendments to rules that would require dealer disclosure of markups or markdowns to retail customers when the dealer is acting as a principal and selling from or buying for its own account.
"I believe that disclosure of markups for riskless principal trades will be a giant step forward in giving investors the type of meaningful disclosure they deserve," Piwowar said.
He also addressed what he sees as a need for more pre-trade price transparency in the fixed income markets.
