MuniLand

The newly confirmed chairman of the Securities and Exchange Commission, Mary Jo White, testified to the House Financial Services Committee on May 16 and requested an increase in funding for her agency. SEC funding does not come from federal government revenues, but from fees assessed on securities transactions. White’s request to increase the agency’s funding does nothing to increase the federal deficit or take funding from other programs. She is merely asking to spend the money the agency collects.

This is the SEC’s Budget Authority (what Congress says the SEC can spend, in the center column) and the Actual Obligations (what was spent, in the right column) for the last several years, in thousands:

There have been increases since the financial crisis in 2008, but the Budget Authority from Congress was frozen between fiscal year 2012 and 2013. Chairman White explains why this will not do:

The securities markets we oversee are continuously evolving, and the technology of today is most certainly not the technology of tomorrow. Fast-paced and constantly changing markets – fueled by financial firms whose annual technology budgets exceed what the SEC spends on its entire operations – require constant monitoring and analysis. When issues are identified, the investing public deserves appropriate and timely regulatory and enforcement responses. The securities industry also has been growing rapidly in size. In the last decade, trading volume in the equity markets has more than doubled, as have assets under management by investment advisers. It is expected that these trends will continue in the foreseeable future. At the same time, the SEC’s jurisdiction has grown to cover significant new aspects of the securities markets.

And how much of the fees that the SEC collects would Chairman White like to spend?:

On Tuesday the SEC is holding a roundtable on credit ratings to address the ongoing question of ratings shopping. Rating shopping is when a bond issuer shops its deal to various credit rating agencies to see who will assign the highest rating. The rating agencies that will assign the best ratings are given the business and the rating fee. Here is how the SEC describes its event:

As previously announced, the roundtable will consist of three panels. The first panel will discuss the potential creation of a credit rating assignment system for asset-backed securities. The second panel will discuss the effectiveness of the SEC’s current system to encourage unsolicited ratings of asset-backed securities. The third panel will discuss other alternatives to the current issuer-pay business model in which the issuer selects and pays the firm it wants to provide credit ratings for its securities.

The possibility of a credit rating assignment system comes from legislation that Minnesota’s senator Al Franken inserted in Dodd-Frank. Franken’s law requires that the SEC study the feasibility of a bureau or panel that would assign a rating agency to rate an offering. Currently issuers choose which firms will rate their offering although for structured finance or asset-backed deals issuers must share the particulars of the new deal with all raters recognized by the SEC in that category. This is equivalent disclosure and something that I have advocated with the SEC since 2007 and Congress since 2008. It has slightly increased competition in rating structured finance securities as seen in the chart above although the size of the market has declined since 2007.

The near-bankrupt city of Harrisburg, Pennsylvania was charged this week by the Securities and Exchange Commission with securities fraud. Here is the official language (emphasis mine):

The Securities and Exchange Commission today charged the City of Harrisburg, Pa., with securities fraud for its misleading public statements when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated.

An SEC investigation found that the misleading statements were made in the city’s budget report, annual and mid-year financial statements, and a State of the City address. This marks the first time that the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents. Harrisburg has agreed to settle the charges.

The SEC held a fixed income roundtable on Tuesday to discuss two important issues: market structure and ways to improve it for municipal and corporate bonds. The SEC has as much authority to regulate this market as it does for equity securities, and it appears to be finally flexing its muscles with a little structure for the $18.7 trillion fixed income market.

I tweeted the roundtable all day (you can read the whole thread here), and I’ve posted the best ones here (parentheses are my editorial comments):

Good sign… new @sec chair Mary Jo White is attending the Fixed Income Roundtable 1.usa.gov/15cEjRm

The SEC is holding a Fixed Income Roundtable on April 16 to examine ways to improve the transparency and efficiency of the fixed income markets. This is the first time that I am aware of that the SEC has focused exclusively on the market structure of fixed income. Although fixed income as an asset class is over twice the size of the equity market, and the SEC was given authority in 1975 to oversee this market, almost nothing has been done to regulate it.

All US bond trading is done over the counter or through alternative trading systems (ATS), which are trading platforms registered as dealers. ATS do not have responsibility to oversee the conduct of the other dealers trading on their platform. Think of them as fancy eBay systems for dealers to interact with each other. Rule 300(a) of the SEC’s Regulation ATS provides the following legal definition of an “alternative trading system”:

Any organization, association, person, group of persons, or system:

That constitutes, maintains, or provides a marketplace or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of Rule 3b-16 of this chapter; and That does not:

1      Set rules governing the conduct of subscribers other than the conduct of such subscribers’ trading on such organization, association, person, group of persons, or system; or

The SEC has announced that it will hold a Fixed Income Roundtable on April 16 in Washington to discuss improving the transparency and efficiency of fixed income markets. This news is welcome and long overdue. As I wrote in a comment letter to the SEC in 2008 (emphasis mine):

Former SEC Commissioner Laura S. Unger in a speech to the Bond Market Association in 1999 addressed the [SEC’s] role in facilitating a fair market structure for fixed income investors.

…In adopting the 1975 Amendments to the Securities Laws, Congress gave the Commission the authority to facilitate developing a national market system for securities.

I blogged recently in support of Columbia Law professor John Coffee’s proposal for the SEC to hire outside expert attorneys to prosecute complex cases. He called the performance of the current SEC enforcement division lackluster, and wrote that it is “an overworked, underfunded agency that is subject to severe resource constraints.”

The soon to retire head of the SEC’s enforcement division, Robert Khuzami, blasted Professor Coffee’s idea in the National Law Journal last week with a piece titled “Unfair claims, untenable solution.” The New York Post nicknamed Khuzami the “master blaster” with a “poison pen” for going after Coffee.

In his rebuttal to Coffee, Khuzami lauds the number of settlements the SEC has achieved under his tenure. But the number of settlements under Khuzami and former SEC Chairman Mary Shapiro has actually declined from post-Sarbox-era SEC Chairmen William Donaldson and Chris Cox. NERA Economic Consulting shows this in its recently released SEC Settlement Trends: 2H12 Update (page 19):

The majority of pundits and market observers have only tuned into the effectiveness of the SEC as financial market regulator since 2008, when the financial system nearly collapsed. So far, criticism has been relatively shallow. But when one of the most influential securities attorneys in America, Columbia University’s John Coffee, weighs in on the effectiveness of the SEC’s enforcement actions, we should all take note. Coffee’s SEC biography gives some background on his preeminence:

According to a recent survey of law review citations, Professor Coffee is the most cited law professor in law reviews in the combined corporate, commercial, and business law field.

And what does Professor Coffee have to say about the efforts of the SEC to prosecute financial market lawbreakers? He wrote on the CLS Blue Sky Blog:

The SEC – the top law enforcer for muniland – has been riding the range. With 17 municipal securities enforcement actions in 2012, the SEC cops have come up with a nice collection of scalps.

The Bond Buyer held a webinar Wednesday on municipal disclosure with John Cross, who heads the SEC’s Office of Municipal Securities, Jay Goldstone, who heads the Municipal Securities Rulemaking Board and various municipal attorneys. It was an excellent summary of muniland disclosure laws, but what I found most interesting was John Cross’ discussion of the top SEC enforcement actions in muniland for 2012. Rounding up the bad guys. Here are the top four enforcement actions according to Cross:

1) The General Electric and Wells Fargo bid-rigging cases: In the case of General Electric, the U.S. Justice Department prosecuted criminal charges. Reuters reports:

The New York Times reported on Wednesday that Sallie Krawcheck, formerly of Citi and Bank of America, is the leading contender to be named chairman of the Securities and Exchange Commission. Let’s hope that President Obama comes to his senses and names someone more fit to the post. From the Times:

With Ms. [Mary] Miller withdrawing, Sallie L. Krawcheck, a long-time Wall Street executive, has emerged as a potential front-runner. Over the last year, she has become a familiar face in Washington, making the rounds with lawmakers to discuss consumer issues.

In my time working with the agency over a number of years I have been involved in multiple rounds of rule writing about the regulation of credit rating agencies. There are some particular kinds of personality traits that are necessary to herd and motivate an agency of over 1,000 lawyers. Based on my reading of her record, Ms Krawcheck is not qualified to take on this role.