Disclosure is the beat
Disclosure is the beat
On Tuesday at the SIFMA Muni Bond Summit in New York, much of the discussion by bond market participants related to transparency and disclosure issues. A lot of this was in response to new requirements in Dodd-Frank, but there was also an acknowledgement that many problems in the crisis of 2007-2009 came from a lack of information and data in many parts of the market. For example small municipal issuers had more trouble accessing the bond market to issue new bonds if their public reporting was deficient or out of date.
The heavy hitter of the bond summit was SEC Commissioner Elise Walter, who appeared by video link and broke news that the SEC would not ask Congress to overturn the Tower Amendment, a 1975 law that bars the SEC from interfering in the fiscal affairs of state and local governments. She discussed current legislation that would skirt the Tower Amendment and give the SEC authority to require municipal issuers to file disclosure, though it would grant no authority to review and approve those filings. From the Bond Buyer:
Walter repeated her call for Congress to increase the SEC’s authority so that it could set “baseline disclosure requirements.”
The Tower Amendment to the Securities Exchange Act of 1934 prohibits the SEC and the Municipal Securities Rulemaking Board from requiring muni issuers to file pre-sale disclosure documents.
A draft bill being circulated by Reps. Mike Quigley, D-Ill., and Patrick McHenry, R-N.C., however, would authorize the SEC to require issuers to disclose primary and secondary market bond documents directly or indirectly through dealers or others. It would also give the commission authority to direct the content and timing of those documents.
She also said that the SEC should more broadly examine the practices of the bond markets. The Bond Buyer reports:
“People who have not previously been tuned into what that board is doing really should pay attention,” [SEC Commissioner Walter] said.
Separately, Walter said the SEC’s muni hearings revealed “certain softnesses in practices.”
She said state and local governments need better training in municipal disclosure and better disclosure practices. In addition, she noted there are significant conflicts of interest that affect the pricing of swaps, as well as indications many muni officials do not understand swaps.
Walter said she also wants to persuade the SEC to take a “long-term, deep-dive look” at the fixed-income market and its current structure, but added that such a study and any resulting recommendations may not be completed until after she leaves the commission.
Walter was sworn in as commissioner on July 9, 2008. Her term expires in June 2012.
I’ll write more about the issues raised at the bond summit over the next few days. Although much of what was discussed was complex, the conversation helped illuminate many of the market moves that don’t necessarily make sense on the surface. Many of these issues are the bedrock of a more open and stable market structure.
SEC catches RBC Capital Markets in its CDO net
Members of the public who choose to serve on their local school or town board are often lawyers, doctors and interested parents but rarely financial professionals. If you have met any local public officials, it’s almost always the case that they lack the sophistication needed to buy and sell complex Wall Street products for their communities. I’ve always considered it predatory behavior for Wall Street firms to sell complex financial products to these people. But it happens more than it should and yesterday the SEC announced charges against RBC for duping some Wisconsin school boards. From the SEC:
The Securities and Exchange Commission today charged RBC Capital Markets LLC for misconduct in the sale of unsuitable investments to five Wisconsin school districts and its inadequate disclosures regarding the risks associated with those investments.
According to the SEC’s order instituting administrative proceedings, RBC Capital marketed and sold to trusts created by the school districts $200 million of credit-linked notes that were tied to the performance of synthetic collateralized debt obligations (CDOs). The school districts contributed $37.3 million of district funds to the investments with the remainder of the investment coming from funds borrowed by the trusts. The sales took place despite significant concerns within RBC Capital about the suitability of the product for municipalities like the school districts. Additionally, RBC Capital’s marketing materials failed to adequately explain the risks associated with the investments.
RBC Capital agreed to settle the SEC’s charges by paying a total of $30.4 million that will be distributed in varying amounts to the school districts through a Fair Fund.
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