SEC Commissioner Piwowar Makes Recommendations Regarding Municipals (with Lofchie Comment)

At the 2014 Municipal Finance Conference, Commissioner Michael Piwowar discussed several key issues regarding the municipal finance industry.

Commissioner Piwowar stated that there are some potential reforms in the existing municipal market regime that should be undertaken, explaining that the reforms are not only achievable, but are gaining support.

The first area Commissioner Piwowar discussed was riskless principal transactions, noting that under the current regulatory environment these transactions allow the dealer to hide its compensation from a customer "merely by altering the method of execution used." Commissioner Piwowar went on to state that it is time to require dealers to disclose markups and markdowns on all riskless principal bond transactions. In disclosing the markups, Commissioner Piwowar explained that "same-day time frame to identify riskless principal transactions would be both consistent with natural break points in the data and workable for market participants."

Commissioner Piwowar went on to identify pre-trade price transparency as an area of concern. He commended the MSRB's Electronic Municipal Market Access System ("EMMA") for providing "a wealth of historical pricing information in the municipal securities market in an easy to access format," yet noted that more must be done for publicly available information on the pre-trade pricing for municipal-based financial products. One issue he highlighted relating to lack of transparency was the reliance of alternative trading systems to provide pricing information; however, the systems only provide prices and requests-for-quotes to members and not the general public. Commissioner Piwowar voiced his full support to incrementally increase pre-trade price transparency in the municipal securities market by amending Regulation ATS to mandate the public dissemination of pricing information for certain transactions on significant alternative trading systems.

Commissioner Piwowar additionally mentioned the SEC's new Continuing Disclosure Cooperation Initiative for municipalities ("MCDC Initiative"), which is intended to address violations of the federal securities laws by municipal issuers and underwriters of municipal securities in connection with certain representations about continuing disclosures in bond offering documents. He noted that the SEC recently extended the self-reporting deadline for underwriters until September 10, 2014, and issuers until December 1, 2014.

Lofchie Comment: As Commissioner Piwowar rightly observes, the effect of requiring broker-dealers to disclose their mark-ups on riskless principal transactions would have a significant impact on the debt markets, given that any such disclosure requirement imposed by MSRB as to municipals would likely be copied by FINRA or the SEC as to corporate bonds. The regulatory focus on the rules governing the municipal market is likely to prove relevant to the corporate debt market.

See: SEC Piwowar Speech.Related news: SEC Modifies Municipalities Disclosure Initiative (July 31, 2014) SIFMA and Other Associations Submit Comments to SEC on Structure of MCDC (July 25, 2014); SEC Commissioner Gallagher Discusses Muni Market Issues (with Lofchie Comment) (May 29, 2014).