WASHINGTON — Federal regulators are urging state treasurers to take a leadership role in encouraging municipal governments to comply with their disclosure obligations, and are warning that further rulemaking and guidance will have a major impact on municipal bond issuers.
Municipal Securities Rulemaking Board and the Securities and Exchange Commission officials made the remarks at the National Association of State Treasurers' annual legislative conference here on Tuesday. Both regulatory bodies have recently released major rules or rule proposals governing municipal advisors, and are seeking to address issuer concerns in further proposals and guidance to be issued in the coming months.
MSRB chairman Dan Heimowitz told treasurers that there is an issuer stake even in MSRB actions that appear aimed squarely at the broker-dealer community that the board has regulated for decades. The MSRB is mindful that its mission does not include regulating issuers, Heimowitz said, but issuers should be very involved in rulemaking dialogue because they will be affected by regulations that impact the market.
Heimowitz said MA rulemaking, mandated by the Dodd-Frank Act and stemming from the SEC's registration rule released last year, will help issuers by making sure MAs know and understand their obligations under the law as well as that they have a level of competency. The MSRB has already proposed rules governing the standards of conduct for MAs, their supervisory requirements, and a requirement to take a professional qualifications exam. The board also plans to propose a pay-to-play rule for MAs this year, Heimowitz said, which will limit the ability of advisory firms to donate money to politicians and then do business with their governments.
"We think bringing people in on the merits and not just on the size of the checks that they write is very important," Heimowitz said.
He and MSRB executive director Lynnette Kelly also urged the attendees to take the lead in helping smaller issuers within their states comply with their continuing disclosure obligations. Kelly recently co-signed a letter with NAST president and Utah treasurer Richard Ellis asking NAST members to be partners in that endeavor. Heimowitz said the MSRB looks to treasurers as the "vanguard" within their states, and Kelly said state-level disclosure is not as much a major concern for the MSRB.
"We are not worried about state governments," Kelly told the group Tuesday. "It's really the local governments within your jurisdictions that need some help."
SEC muni chief John Cross spoke immediately after the MSRB, and provided treasurers with an update on municipal advisor guidance and how the rule may affect them when it becomes final on July 1. There has been controversy over the registration rule since the beginning, with dealers and some issuers contending that it could inhibit the normal business between issuers and their underwriters.
"Municipal issuers should control the process for decisions that affect them," Cross said, adding that the development of the SEC rule created several ways that issuers could gather advice from many sources without those sources having to register as MAs and becoming bound by a federal fiduciary duty and thus unable to underwrite bonds. Issuers can take advantage of the independent registered municipal advisor (IRMA )exemption, Cross said, which could allow dealers to provide advice as long as the issuer has retained and certified that it will rely on its own advisor.
"An awful lot of the larger issuers already have financial advisors and they will be quick to use that exemption," Cross predicted.
Cross said the SEC will issue another batch of guidance before the rule becomes effective.
Ellis asked Cross what message issuers should take away from the numerous enforcement actions levied against them in 2013, during which the SEC sought financial penalties from some muni issuers for their disclosure failures. Cross said that SEC chairman Mary Jo White does not believe in "rulemaking by enforcement," but that issuers should expect the SEC will continue to use enforcement actions as a tool to nudge issuers in the right direction.
"I think there is a philosophy to use our limited resources to encourage compliance," he said.
