Securities and Exchange Commission Chairman Christopher Cox called for Congress to set new disclosure rules for municipal borrowers, saying there is an "urgent need" to improve the information investors receive.
Cox, in a speech in Los Angeles yesterday, also suggested that lawmakers bolster the Governmental Accounting Standards Board, which sets accounting standards for states and municipalities, by making its rules mandatory and giving it an independent source of money. Texas has allowed local governments there to ignore rules requiring them to disclose how much they expect to pay for retired workers' health care.
"There is every reason to worry about this erosion in current standards because what we have today is already so sorely lacking," Cox said.
The SEC in March said it was evaluating whether state and local governments should be forced to disclose more information to investors who buy the $400 billion of municipal bonds sold each year for schools, sewers and other projects. The review follows the agency's November sanction against San Diego for inadequate disclosures made to buyers of its debt and comes as cities, towns and school districts increase their use of unregulated financial contracts such as interest rate swaps.
Cox also said the SEC in the next few months will review whether bond dealers are complying with a rule from the Municipal Securities Rulemaking Board that bans the use of political donations to win business, a practice known as pay-to-play.
State and local governments, with $2.4 trillion of debt outstanding, have less stringent disclosure rules than businesses. Governments don't have to file registration statements with the SEC for bond offerings, as corporations do.
The prospect of tighter requirements on municipal bond sellers has sparked an outcry among local government officials, who say new laws would impose costly and unnecessary burdens. Critics including Jeffrey Esser, executive director of the 17,000-member Government Finance Officers Association, say municipal bonds are less risky than other types of debt because few governments default.
"They should do a better job of enforcing the existing regulations," Esser said after Cox's speech. "We will certainly mount a full-court press opposing this."
Marc Lackritz, chief executive of the Securities Industry and Financial Markets Association, a lobbying group for Wall Street banks and money managers, said in a statement yesterday that only 0.1 percent of municipal bonds have defaulted since 1970 and that the market has provided "a safe haven" to investors.
Cox said it is up to Congress to decide how to improve the municipal bond market, while offering his own ideas for what is needed.
While the SEC has the power to police securities fraud, as was done in San Diego, no federal regulator has the power to insist that local officials disclose all information that could affect the price of their bonds, as they do with corporations.
Cox said the release of better information can help head off costly debacles like the bankruptcy of Orange County, Calif., in 1994, when Cox served as one of the area's representatives in Congress.
"Today's investors in municipal securities are, in many respects, second-class citizens under current law," he said.
After his speech, Cox told reporters that the SEC will accelerate enforcement actions against companies involved in stock option manipulation as the agency wraps up investigations. "It's very likely that the pace of announcements will increase because the work is maturing," he said. "There will be much more news in this area" in coming weeks and months, he said.
More than 220 companies have disclosed internal or federal investigations alongside a sweeping U.S. probe of option backdating and other compensation irregularities. Stock options let holders buy shares at a later date, usually at the market price on the day they were granted. Backdating options to when share prices were relatively low inflates their value. If not properly disclosed, the practice may break laws because it hides costs from shareholders.
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