HFSC Hearing on Municipal Securities
House Finanical Services Subcommittee on Capital Markets and GSEs
“Examining the Agenda of Regulators, SROs, and Standards-Setters
for Accounting, Auditing, and Municipal Securities”
Thursday, September 22, 2016
Key Topics & Takeaways
- MCDC: Ranking Member Carolyn Maloney (D-N.Y.) asked about enforcement actions taken in the municipal market. Kane replied that the MCDC initiative was introduced to address the lack of compliance with continuing disclosure initiatives, and called the program “incredibly successful.”
- Municipal Advisors: Rep. Randy Hultgren (R-Ill.) said he has heard of some unscrupulous marketing practices that would wrongly suggest that states and municipalities are required to retain the services of municipal advisors despite statute being clear that it is not a requirement. He asked if this is an issue that Colby has required, and whether Congress should act to clarify its intent. Colby said he supports Congress clarifying its intent.
- Mark-Up Disclosures: Kelly stated that the MSRB has worked closely with FINRA to achieve uniform disclosures across fixed income markets, calling this an example of where a thorough economic analysis worked. She continued that rules were filed with the SEC and are currently open to public comment. Kelly stated that she expects an effective date as long as 12 months after approval because this kind of disclosure requires significant technological changes, and the industry will need time for proper implementation.
Witnesses
- Wesley R. Bricker, Interim Chief Accountant, Office of the Chief Accountant, Securities and Exchange Commission
- James R. Doty, Chairman, Public Company Accounting Oversight Board
- Russell G. Golden, Chairman, Financial Accounting Standards Board
- Jessica Kane, Director, Office of Municipal Securities, Securities and Exchange Commission
- Lynnette Kelly, Executive Director, Municipal Securities Rulemaking Board
- Robert L. D. Colby, Chief Legal Officer, Financial Industry Regulatory Authority
Opening Statements
In his opening statement, Chairman Scott Garrett (R-N.J.) stressed the Subcommittee’s responsibility to hold regulatory entities accountable to the public and explained that hearings allow it to ensure regulators are carrying out their statutory missions. He voiced concerns about the “lack of due process” associated with the private charges and enforcement proceedings of the Public Company Accounting Oversight Board (PCAOB), insisting that all should have the right to defend themselves. Garrett expressed concern about possible changes to the definition of “materiality” in financial statements, saying the existing definition has worked well. He also argued the importance of conducting proper cost-benefit analysis in any rulemaking, and stated that he would like to hear about how the practice is utilized by the witnesses.
Ranking Member Carolyn Maloney (D-N.Y.) noted the importance of municipal bonds and their centrality to any infrastructure package to be considered in the next Congress.
Rep. Brad Sherman (D-Calif.) commented that the Financial Accounting Standards Board (FASB) exercises “tremendous government power” despite the fact that it gets little attention and is not subject to cost-benefit analysis requirements, the Open Meetings Act, or Senate confirmation of its members. He opined that this would be alright had it not made the “terrible” decision of allowing companies to write off research expenses.
Rep. Ed Perlmutter (D-Colo.) voiced concerns about the impact of regulations on small broker-dealers. He noted these firms have been forced to consolidate or merge to achieve economies of scale. He lamented that while many in Congress have talked about relief for community banks, no one has been paying attention to small broker-dealers.
Testimony
Wesley R. Bricker, Interim Chief Accountant, Office of the Chief Accountant, Securities and Exchange Commission
In his testimony, Bricker said his office oversees the FASB and PCAOB, and that it has focused on the implementation of recent standards, such as how companies should report information about the nature, timing and extent of revenue from customers. He also called to mind the importance of auditors and the oversight of the PCAOB, which has improved the value of audit reports for consumers and investors.
James R. Doty, Chairman, Public Company Accounting Oversight Board
Doty, in his testimony, called the PCAOB a “vital resource” for protecting investors and claimed that its programs have been “making a real difference.” He touted the value of its inspections in improving audits and enforcement actions that have rooted out bad actors and promoted trust.
Russell G. Golden, Chairman, Financial Accounting Standards Board
In his testimony, Golden said FASB standards are not intended to drive behavior, but rather to allow investors to make informed decisions. He said the goal of the FASB is to improve the availability of useful information and to help firms apply new standards to facilitate smooth transitions.
Jessica Kane, Director, Office of Municipal Securities, Securities and Exchange Commission
Kane testified about the history of her office’s creation, and noted its work to implement municipal advisor registration rules. She also highlighted the Securities and Exchange Commission’s (SEC) initiatives to improve municipal disclosures and market structure, such as best execution rules, mark-up and mark-down disclosures for broker-dealers, and the providing of pre-trade pricing information. Kane also briefly discussed the Municipal Continuing Disclosure Cooperation (MCDC) program, commenting that self-reported violations have provided valuable information about how Rule 15c2-12 is working.
Lynnette Kelly, Executive Director, Municipal Securities Rulemaking Board
In her testimony, Kelly said the Municipal Securities Rulemaking Board (MSRB) has made “significant strides” in providing issuers and investors with an “unprecedented” level of transparency. She specifically commented on the MSRB’s drive to provide retail investors with a better view of the municipal market through its EMMA website, as well as the prioritization of education for issuers on their disclosure responsibilities. Kelly stated that the MSRB believes there is insufficient disclosure of bank loans by municipal entities, which is essential to market transparency and could affect the credit profile of an issuer.
Robert L. D. Colby, Chief Legal Officer, Financial Industry Regulatory Authority
Colby testified that the municipal market is overseen through a “well-developed” relationship between the SEC, MSRB and Financial Industry Regulatory Authority (FINRA). He said FINRA serves as the enforcement authority, and that it is responsible for examining and enforcement compliance for broker-dealers. He discussed the coordination with the SEC and MSRB to enhance transparency and promote better execution quality will be making better pricing information available to customers that will allow them to better evaluate the cost and quality of services.
Questions
Privacy of Administrative Proceedings
Garrett questioned why PCAOB administrative proceedings should be private, suggesting that investors in public companies should know when charges are brought against a company. Dolby replied that the present situation is an anomaly that creates harm.
Sherman asked whether Dolby would be hesitant to investigate a firm if he knew a firm was unsure of any wrongdoing, and making an investigation public would hurt investor confidence. Dolby answered that investigations should be confidential, and that he is not seeking the authority to announce investigations. He explained that he is only asking for the authority to publish facts if formal charges have been filed.
Treasury Trade Reporting
Maloney asked about the proposed rule for the reporting of Treasury trades and where it stands now. Colby answered that the rule has been filed with the SEC, and is going through a round of comments, and that he hopes the Commission will approve it shortly.
Enforcement Actions in the Municipal Market
Maloney asked about enforcement actions taken in the municipal market. Kane replied that the MCDC initiative was introduced to address the lack of compliance with continuing disclosure initiatives. Colby added that FINRA focuses on suitability issues for customers and markups in the transactions area.
Replying to a similar question from Rep. David Scott (D-Ga.), Kane reiterated that the area of continuing disclosures saw widespread problems, and called the MCDC program “incredibly successful.”
Rep. Dennis Schweikert (R-Ariz.) recalled that when he was a county treasurer, legal fees when refinancing bonds were very high. He asked about the MSRB’s role in monitoring such costs for municipalities. Kelly replied that MSRB rules apply to broker-dealers and municipal advisors, and prohibit the charging of excessive fees. She added that the MSRB has no oversight over bond attorneys, but that there are some state laws that make expenses more transparent.
Municipal Advisors
Rep. David Scott (D-Ga.) commented that he was very happy the Dodd-Frank Act created the Office of Municipal Securities at the SEC. He asked for an update on any emerging threats that Kane sees in the municipal market. Kane replied by explaining that the Dodd-Frank Act required municipal advisors to register with the SEC, and that the MSRB has put out a suite of conduct rules for these advisors, including a fiduciary responsibility. She explained that these are designed to protect municipalities from conflicts of interest.
Rep. Randy Hultgren (R-Ill.) said he has heard of some unscrupulous marketing practices that would wrongly suggest that states and municipalities are required to retain the services of municipal advisors despite statute being clear that it is not a requirement. He asked if this is an issue that Colby has required, and whether Congress should act to clarify its intent. Colby said he supports Congress clarifying its intent.
Rep. Bruce Poliquin (R-Maine) stated that he was surprised, in his time as Maine state treasurer, to learn that before his tenure, negotiated bond sales were often used more than competitive sales. He asked whether states or municipalities are required to employ the services of independent advisors when issuing bonds, commenting that such advisors were very helpful in advising competitive bond sales to save money. Kane responded that the decision to hire market professionals is made at the state and local government. She added that municipal advisor registration rules bring a new class of registrant under SEC enforcement, and that one of the benefits of hiring a municipal advisor is that they owe a fiduciary duty to their clients and can help evaluate decisions.
Mark-Up Disclosures
Rep. Randy Neugebauer (R-Texas) asked about the MSRB’s initiatives to require dealers to disclose mark-ups. Kelly answered that the MSRB has worked closely with FINRA to achieve uniform disclosures across fixed income markets, calling this an example of where a thorough economic analysis worked. She continued that rules were filed with the SEC and are currently open to public comment. Kelly stated that she expects an effective date as long as 12 months after approval because this kind of disclosure requires significant technological changes, and the industry will need time for proper implementation.
Money Market Funds Rule
Hultgren noted that the SEC was required by Dodd-Frank to promulgate rules to reform money market funds, and that a significant portion of municipal debt is held by money market funds. He added that assets in tax-exempt funds have decreased, and costs of borrowing for issuers have increased significantly. He asked what kind of cost-benefit analysis was used in this rule. Kane answered that she is aware of the issue, and that the amendments to the rules are not effective until October, and that many factors are being considered by investors in how to allocate capital.
For more information on this hearing, please click here.
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House Finanical Services Subcommittee on Capital Markets and GSEs
“Examining the Agenda of Regulators, SROs, and Standards-Setters
for Accounting, Auditing, and Municipal Securities”
Thursday, September 22, 2016
Key Topics & Takeaways
- MCDC: Ranking Member Carolyn Maloney (D-N.Y.) asked about enforcement actions taken in the municipal market. Kane replied that the MCDC initiative was introduced to address the lack of compliance with continuing disclosure initiatives, and called the program “incredibly successful.”
- Municipal Advisors: Rep. Randy Hultgren (R-Ill.) said he has heard of some unscrupulous marketing practices that would wrongly suggest that states and municipalities are required to retain the services of municipal advisors despite statute being clear that it is not a requirement. He asked if this is an issue that Colby has required, and whether Congress should act to clarify its intent. Colby said he supports Congress clarifying its intent.
- Mark-Up Disclosures: Kelly stated that the MSRB has worked closely with FINRA to achieve uniform disclosures across fixed income markets, calling this an example of where a thorough economic analysis worked. She continued that rules were filed with the SEC and are currently open to public comment. Kelly stated that she expects an effective date as long as 12 months after approval because this kind of disclosure requires significant technological changes, and the industry will need time for proper implementation.
Witnesses
- Wesley R. Bricker, Interim Chief Accountant, Office of the Chief Accountant, Securities and Exchange Commission
- James R. Doty, Chairman, Public Company Accounting Oversight Board
- Russell G. Golden, Chairman, Financial Accounting Standards Board
- Jessica Kane, Director, Office of Municipal Securities, Securities and Exchange Commission
- Lynnette Kelly, Executive Director, Municipal Securities Rulemaking Board
- Robert L. D. Colby, Chief Legal Officer, Financial Industry Regulatory Authority
Opening Statements
In his opening statement, Chairman Scott Garrett (R-N.J.) stressed the Subcommittee’s responsibility to hold regulatory entities accountable to the public and explained that hearings allow it to ensure regulators are carrying out their statutory missions. He voiced concerns about the “lack of due process” associated with the private charges and enforcement proceedings of the Public Company Accounting Oversight Board (PCAOB), insisting that all should have the right to defend themselves. Garrett expressed concern about possible changes to the definition of “materiality” in financial statements, saying the existing definition has worked well. He also argued the importance of conducting proper cost-benefit analysis in any rulemaking, and stated that he would like to hear about how the practice is utilized by the witnesses.
Ranking Member Carolyn Maloney (D-N.Y.) noted the importance of municipal bonds and their centrality to any infrastructure package to be considered in the next Congress.
Rep. Brad Sherman (D-Calif.) commented that the Financial Accounting Standards Board (FASB) exercises “tremendous government power” despite the fact that it gets little attention and is not subject to cost-benefit analysis requirements, the Open Meetings Act, or Senate confirmation of its members. He opined that this would be alright had it not made the “terrible” decision of allowing companies to write off research expenses.
Rep. Ed Perlmutter (D-Colo.) voiced concerns about the impact of regulations on small broker-dealers. He noted these firms have been forced to consolidate or merge to achieve economies of scale. He lamented that while many in Congress have talked about relief for community banks, no one has been paying attention to small broker-dealers.
Testimony
Wesley R. Bricker, Interim Chief Accountant, Office of the Chief Accountant, Securities and Exchange Commission
In his testimony, Bricker said his office oversees the FASB and PCAOB, and that it has focused on the implementation of recent standards, such as how companies should report information about the nature, timing and extent of revenue from customers. He also called to mind the importance of auditors and the oversight of the PCAOB, which has improved the value of audit reports for consumers and investors.
James R. Doty, Chairman, Public Company Accounting Oversight Board
Doty, in his testimony, called the PCAOB a “vital resource” for protecting investors and claimed that its programs have been “making a real difference.” He touted the value of its inspections in improving audits and enforcement actions that have rooted out bad actors and promoted trust.
Russell G. Golden, Chairman, Financial Accounting Standards Board
In his testimony, Golden said FASB standards are not intended to drive behavior, but rather to allow investors to make informed decisions. He said the goal of the FASB is to improve the availability of useful information and to help firms apply new standards to facilitate smooth transitions.
Jessica Kane, Director, Office of Municipal Securities, Securities and Exchange Commission
Kane testified about the history of her office’s creation, and noted its work to implement municipal advisor registration rules. She also highlighted the Securities and Exchange Commission’s (SEC) initiatives to improve municipal disclosures and market structure, such as best execution rules, mark-up and mark-down disclosures for broker-dealers, and the providing of pre-trade pricing information. Kane also briefly discussed the Municipal Continuing Disclosure Cooperation (MCDC) program, commenting that self-reported violations have provided valuable information about how Rule 15c2-12 is working.
Lynnette Kelly, Executive Director, Municipal Securities Rulemaking Board
In her testimony, Kelly said the Municipal Securities Rulemaking Board (MSRB) has made “significant strides” in providing issuers and investors with an “unprecedented” level of transparency. She specifically commented on the MSRB’s drive to provide retail investors with a better view of the municipal market through its EMMA website, as well as the prioritization of education for issuers on their disclosure responsibilities. Kelly stated that the MSRB believes there is insufficient disclosure of bank loans by municipal entities, which is essential to market transparency and could affect the credit profile of an issuer.
Robert L. D. Colby, Chief Legal Officer, Financial Industry Regulatory Authority
Colby testified that the municipal market is overseen through a “well-developed” relationship between the SEC, MSRB and Financial Industry Regulatory Authority (FINRA). He said FINRA serves as the enforcement authority, and that it is responsible for examining and enforcement compliance for broker-dealers. He discussed the coordination with the SEC and MSRB to enhance transparency and promote better execution quality will be making better pricing information available to customers that will allow them to better evaluate the cost and quality of services.
Questions
Privacy of Administrative Proceedings
Garrett questioned why PCAOB administrative proceedings should be private, suggesting that investors in public companies should know when charges are brought against a company. Dolby replied that the present situation is an anomaly that creates harm.
Sherman asked whether Dolby would be hesitant to investigate a firm if he knew a firm was unsure of any wrongdoing, and making an investigation public would hurt investor confidence. Dolby answered that investigations should be confidential, and that he is not seeking the authority to announce investigations. He explained that he is only asking for the authority to publish facts if formal charges have been filed.
Treasury Trade Reporting
Maloney asked about the proposed rule for the reporting of Treasury trades and where it stands now. Colby answered that the rule has been filed with the SEC, and is going through a round of comments, and that he hopes the Commission will approve it shortly.
Enforcement Actions in the Municipal Market
Maloney asked about enforcement actions taken in the municipal market. Kane replied that the MCDC initiative was introduced to address the lack of compliance with continuing disclosure initiatives. Colby added that FINRA focuses on suitability issues for customers and markups in the transactions area.
Replying to a similar question from Rep. David Scott (D-Ga.), Kane reiterated that the area of continuing disclosures saw widespread problems, and called the MCDC program “incredibly successful.”
Rep. Dennis Schweikert (R-Ariz.) recalled that when he was a county treasurer, legal fees when refinancing bonds were very high. He asked about the MSRB’s role in monitoring such costs for municipalities. Kelly replied that MSRB rules apply to broker-dealers and municipal advisors, and prohibit the charging of excessive fees. She added that the MSRB has no oversight over bond attorneys, but that there are some state laws that make expenses more transparent.
Municipal Advisors
Rep. David Scott (D-Ga.) commented that he was very happy the Dodd-Frank Act created the Office of Municipal Securities at the SEC. He asked for an update on any emerging threats that Kane sees in the municipal market. Kane replied by explaining that the Dodd-Frank Act required municipal advisors to register with the SEC, and that the MSRB has put out a suite of conduct rules for these advisors, including a fiduciary responsibility. She explained that these are designed to protect municipalities from conflicts of interest.
Rep. Randy Hultgren (R-Ill.) said he has heard of some unscrupulous marketing practices that would wrongly suggest that states and municipalities are required to retain the services of municipal advisors despite statute being clear that it is not a requirement. He asked if this is an issue that Colby has required, and whether Congress should act to clarify its intent. Colby said he supports Congress clarifying its intent.
Rep. Bruce Poliquin (R-Maine) stated that he was surprised, in his time as Maine state treasurer, to learn that before his tenure, negotiated bond sales were often used more than competitive sales. He asked whether states or municipalities are required to employ the services of independent advisors when issuing bonds, commenting that such advisors were very helpful in advising competitive bond sales to save money. Kane responded that the decision to hire market professionals is made at the state and local government. She added that municipal advisor registration rules bring a new class of registrant under SEC enforcement, and that one of the benefits of hiring a municipal advisor is that they owe a fiduciary duty to their clients and can help evaluate decisions.
Mark-Up Disclosures
Rep. Randy Neugebauer (R-Texas) asked about the MSRB’s initiatives to require dealers to disclose mark-ups. Kelly answered that the MSRB has worked closely with FINRA to achieve uniform disclosures across fixed income markets, calling this an example of where a thorough economic analysis worked. She continued that rules were filed with the SEC and are currently open to public comment. Kelly stated that she expects an effective date as long as 12 months after approval because this kind of disclosure requires significant technological changes, and the industry will need time for proper implementation.
Money Market Funds Rule
Hultgren noted that the SEC was required by Dodd-Frank to promulgate rules to reform money market funds, and that a significant portion of municipal debt is held by money market funds. He added that assets in tax-exempt funds have decreased, and costs of borrowing for issuers have increased significantly. He asked what kind of cost-benefit analysis was used in this rule. Kane answered that she is aware of the issue, and that the amendments to the rules are not effective until October, and that many factors are being considered by investors in how to allocate capital.
For more information on this hearing, please click here.