Municipal securities

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Municipal securities (or munis) are exempt debt securities issued by state and local governments in the United States and its territories. They include securities issued by agencies or authorities established by those governments. Munis are used to fund items such as infrastructure, schools, libraries, general municipal expenditures or refundings of old debt.

When the United States introduced a federal income tax in 1913, the taxability of interest from municipal securities was challenged based on the constitutional principal of states' rights. That argument was upheld by the Supreme Court for much of the twentieth century but was finally rejected in a 1983 case. Today, congress has a right to tax interest income from municipal securities, but it currently chooses not to. Many states also exempt their securities from their own taxes, which makes those securities particularly attractive investments for their own residents. Of course, capital gains from buying or selling munis in the secondary market are fully taxed. Source: Riskglossary

See also Build America bond, EMMA, municipal bankruptcy, municipal pensions, municipal securities markets, muni swaps and Municipal Securities Rulemaking Board.


Congressional oversight

New House chair may take different direction

The Republican takeover of the House could result in an entirely different perspective on municipal market regulation, if Alabama Republican Spencer Bachus, who has called for greater federal oversight of muni issuers, takes over as chairman of the Financial Services Committee as expected.

Bachus, who would succeed Massachusetts Democrat Barney Frank in January following the Republicans’ win of more than 60 House seats in Tuesday’s mid-term elections, has repeatedly said he would support legislation to boost federal control over state and local issuers.

He made the statements as officials in Jefferson County, which is partly in his district, threatened to file for bankruptcy while negotiating a restructuring of $3.2 billion of variable- and auction-rate sewer warrants after their interest rates skyrocketed.

Though a spokeswoman for Bachus could not be reached for comment, he told American Banker Wednesday that he would like to rewrite the derivatives section of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which generally requires standardized swaps to be traded on exchanges and centrally cleared. He also said he wants to roll back the broad new liability requirements the law imposes on rating agencies and possibly shut down the government-sponsored enterprises Fannie Mae and Freddie Mac, which are not addressed in the Dodd-Frank law.

Bachus has previously said he would like to give the Securities and Exchange Committee authority to regulate muni issuers directly, suggesting he might support a repeal of the so-called Tower Amendment, which currently restricts the SEC from establishing a corporate-style registration system for muni borrowers.

Dodd-Frank on municipal securities oversight

This Alert summarizes Subtitle H of Title IX, designated "Municipal Securities," of the Act. References herein are made to sections 975 through 979 of Subtitle H.

The Act establishes a new Office of Municipal Securities (the "Office") within the U.S. Securities and Exchange Commission (SEC). The Office will administer the rules of the SEC with respect to the practices of municipal securities advisors, brokers, dealers, investors and issuers, and will coordinate with the Municipal Securities Rulemaking Board (MSRB or the "Board") for rulemaking and enforcement actions.

In order to advance the goal of providing better oversight of the municipal securities industry and regulation of the participants in the municipal securities industry, the Act amends sections 15, 15A, 15B and 17 of the Securities Exchange Act of 1934 (the "Exchange Act") to require the registration of municipal advisors and imposes a fiduciary duty on municipal advisors and any person associated with them when advising municipal issuers.

Municipal advisors, like municipal securities dealers and brokers, are now subject to the same laws, fiduciary requirements and MSRB rules enforced by the SEC. The Act amends section 15(b) of the Exchange Act to define a municipal advisor as a person who provides advice to or on behalf of a municipal entity with respect to municipal financial products or the issuance of municipal securities, including the structure, timing and terms of such financial products.

Municipal financial products are municipal derivatives, guaranteed investment contracts and investment strategies. Municipal advisors include financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders and swap advisors. They do not include brokers or dealers serving as underwriters, registered investment advisors providing investment advice, registered commodity traders providing advice related to swaps, attorneys providing legal advice or engineers providing engineering advice.

A municipal advisor and any person associated with a municipal advisor now has a fiduciary duty to any municipal entity it advises and may not engage in any act, practice or course of business that is inconsistent with the municipal advisor's fiduciary duty or that is in contravention of any rules of the MSRB. Municipal advisors are now, like brokers, dealers or municipal securities dealers, subject to censure, suspension or revocation of registration by the SEC for violations of the law as set out in section 15(b)(4) of the Exchange Act.

By the Act, the MSRB is now required to adopt rules providing for the continuing education of municipal advisors and establishing professional standards for municipal advisors. The MSRB may not, however, impose inappropriate regulatory burdens on small municipal advisors.

The Act alters the composition of the MSRB so that a majority of the minimum 15-member Board are independent of municipal securities brokers, dealers or advisors. The new composition of the Board meets the stated goal of the Act, to ensure that the public interest is better protected on the Board. The Board has a new charge to protect the public interest in addition to municipal entities and investors. The Board will consist of eight individuals known as "public representatives," independent of any municipal securities broker, municipal securities dealer or municipal securities advisor. At least one of the public representatives must be a representative of institutional or retail investors in municipal securities. At least one of the public representatives must also represent municipal entities, and another of the public representatives must have knowledge or experience in the municipal securities industries.

The remaining seven "regulated representatives" will consist of individuals associated with a broker, dealer, municipal securities dealer or municipal advisor. At least one of the regulated representatives will be a "broker-dealer," representative of nonbank brokers, dealers or municipal securities dealers. At least one individual must be a representative of banks, and at least one individual must be associated with a municipal advisor. The number of public representatives on the Board must always exceed the number of regulated representatives.

Under the Act, the Board is authorized, in conjunction with or on behalf of any federal financial regulator, to establish information systems and assess fees for such systems, which will serve as a repository for information from participants in the municipal securities market. The purpose of such repository is to assist the Board and any federal financial regulator or self-regulatory organization.

The Board is authorized to provide guidance and assistance to the SEC and Financial Industry Regulatory Authority (FINRA) in examinations and the enforcement of the Board's rules and to retain half of any penalties collected by the SEC in such enforcement actions. The MSRB has expanded authority to regulate the advice provided by municipal advisors to or on behalf of municipal entities and "obligated persons." Obligated persons include any person committed to support the payment of all or part of the obligations on municipal securities.

The MSRB is required to meet at least twice yearly with the SEC and FINRA to share information about the interpretation of MSRB rules and examinations, enforcement of such rules and compliance therewith.

The Act directs the U.S. Comptroller General to conduct a study and review of the disclosures required to be made by issuers of municipal securities within two years of enactment of the Act and report to Congress on the results of the study. The study must

  • compare the amount, frequency and quality of disclosures that issuers of municipal securities are required by law to provide for the benefit of municipal securities holders;
  • evaluate the costs and benefits to various types of issuers of municipal securities of requiring issuers of municipal bonds to provide additional financial disclosures for the benefit of investors; *evaluate the potential benefit to investors from additional financial disclosures and
  • make recommendations relating to disclosure requirements for municipal issuers, including the repeal or retention of the Tower Amendment, section 15(B)(d) of the Exchange Act.

The Tower Amendment restricts the SEC and the MSRP from requiring issuers of municipal securities to file documents with these agencies before their securities are sold. The effect of the Tower Amendment is to place disclosure requirements and burdens on the underwriters of securities, rather than on the issuers. Repeal of the Tower Amendment will likely allow the SEC or MSRP to require issuers to comply with certain disclosure requirements for the benefit of the investing public as well as with generally accepted governmental accounting standards.

The Act also states that within 18 months of enactment, the Comptroller General must submit a report to the U.S. Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Financial Services, detailing the needs of municipal security markets and investors and providing recommendations for improvements to transparency, efficiency, fairness and liquidity of trading, as well as the potential uses of derivatives in municipal securities markets.

Within 180 days after the date the Act is enacted, the Comptroller General is also required to conduct a study evaluating the role and importance of the Governmental Accounting Standards Board (GASB) in the municipal securities market and the manner and level at which the GASB has been funded. The Act now grants authority to the SEC to direct FINRA to assess and collect a fee on municipal securities dealers to fund the GASB.

Wyden and Gregg defend call for shift to tax-credit bonds

Sens. Ron Wyden, (D.,Ore.) and Judd Gregg, (R., N.H.) are defending an proposal they have made to stop the issuance of tax-exempt bonds starting in 2011.

The senators maintain shifting toward the issuance of tax-credit bonds would make the U.S. tax code more equitable.

"Unlike a tax exemption, a tax credit allows tax payers at all income levels to realize the same tax benefits," the senators said in a statement.

Earlier this week, Wyden and Gregg unveiled a rewrite of the nation's tax code that would cut the number of individual income tax brackets to three -- 15%, 25% and 35% -- and create a single corporate income tax rate of 24%. The proposal, however, calls for what would effectively be the closure of the $2.8 trillion market for tax-exempt bonds, a suggestion state and local finance officials and market participants sharply criticize.

Tax-exempt bonds pay investors a coupon rate that is exempt from federal and most home-state taxes. Tax-credit bonds require investors to pay taxes on income but give a credit that would cover 25% of that income.

Tax-credit bonds have been around for more than a decade but have failed to attract a strong following. Tax-exempt bonds have been used by tens of thousands of municipalities working to raise capital.

The Regional Bond Dealers Association maintains it would be a serious mistake to curtail municipalities' ability to issue tax-exempt bonds. The tax-exempt municipal bond market dates to the 1920s and "is deep and liquid with ready investors who are fully accustomed to and comfortable with the products," Mike Nicholas, the association's chief executive said.

Wyden and Gregg included the shift to tax-credit bonds in their legislation as a way to raise revenue, and they accept that not everyone will be happy with the measure.

Still, they said they believe the change would be worthwhile.

"Overall, the significant reduction in tax rates made possible under [the legislation] will give a much-needed boost to individuals and businesses across the board," they said.

Grassley attempts to stop "tax stripping"

The Senate’s top Republican taxwriter has introduced legislation that would block the stripping and selling of tax credits from three kinds of tax-credit bonds. At the same time, Treasury Department and Internal Revenue Service attorneys are working to write stripping rules sought by muni market participants who contend they are needed to jump-start the programs.

Sen. Charles Grassley, the ranking minority member of the Senate Finance Committee, has introduced two bills that would extend programs for qualified zone academy bonds, qualified school construction bonds, and new clean renewable energy bonds. However, the Iowa Republican’s bills, which he introduced last month, also include provisions that would prevent the stripping of credits from the bonds.

The stripping bans were included in the bills because Grassley is concerned the IRS would be unable to properly trace ownership of the strips and prevent abuse, an aide said yesterday.

If passed, the legislation could stifle stripping before it has had a chance to begin.

Congress granted tax-credit bond issuers and investors the ability to strip credits in June 2008 as part of the farm bill, but market participants have been waiting for the Treasury to write rules that shine some light on a litany of questions. Treasury officials have said for months that while stripping guidance is a priority, the work has been bogged down by a number of complicated issues, including how to track the credits.

Grassley’s legislation has some market participants scratching their heads, as stripping was touted as a promising way to expand the current paltry market for tax-credit bonds by making the bonds and tax credits marketable to a broader base of investors.

“Allowing stripping for QSCBs would be hugely beneficial to the program and ultimately to the schools,” Scott Minerd, chief investment officer at Guggenheim Partners LLC, the biggest purchaser of QSCBs, said yesterday.

“Without stripping, there’s a limited appetite for these securities in the long run ... You’ve eliminated at least 85%-90% of all the buyers of bonds in the world, if not more,” he warned.

Guggenheim has purchased $1.2 billion of QSCBs, nearly half of the $2.5 billion that have been issued. The privately held financial services firm had planned by the end of last year to strip and sell the credits from bonds it purchased this fall from the Los Angeles Unified School District, with or without Treasury regulations. However, that attempt hit a wall when rating agencies refused to rate the stripped credits without the Treasury rules, Minerd said.

The viability of traditional tax-credit bonds also has come under question from lawmakers in the House, who last month approved a jobs bill that would allow state and local issuers of QZABs and QSCBs to receive direct Build America Bond-style payments from the Treasury instead of investors receiving tax credits.

Currently, Grassley’s bills have been referred to the Finance Committee, but if they are to gain any legislative momentum, they probably would need to be included in the so-called extenders package, annual legislation that Congress passes to extend expiring tax provisions.

Grassley and Finance Committee chairman Max Baucus, D-Mont., said before the Christmas break that extenders would be one of the first things they tackle in 2010, after spending much of December consumed with health-care reform legislation. The House passed its extenders bill last month, but it did not include any provisions blocking stripping. An aide declined to comment yesterday on whether Baucus supports Grassley’s legislation.

In addition to the proposed ban on stripping for the three kinds of tax-credit bonds, one of Grassley’s bills, S. 2851, would permanently extend the QZAB and QSCB program and authorize an additional $700 million annually for QZABs. The $700 million would be indexed to inflation. Under the bill, QZABs also would no longer have to comply with the Davis-Bacon Fair Labor Act. QSCBs would not be granted any additional authority beyond the current $22 billion authorization.

Grassley’s other bill, S. 2826, would authorize an additional $2.2 billion for CREBs.

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SEC seeks expanded authority over muni market

"A member of the Securities and Exchange Commission called on Wednesday for legislative changes to put municipal bond markets on a more even footing with the stock and corporate bond markets.

The municipal bond market, long a regulatory backwater, has become too prone to defaults and accounting irregularities, said Elisse B. Walter, one of the five S.E.C. commissioners.

In a speech in New York, Ms. Walter said the Depression-era laws that exempted municipal bonds from oversight by the S.E.C. had outlasted their usefulness.

She urged Congress to repeal the Tower Amendment, a 1975 law limiting federal authority over states and local government bodies that raise money on the bond markets.

Currently, municipal bonds do not have to be registered with the S.E.C., and governments generally report their financial condition with the type of accounting that can sometimes make them look much more solid than they would under the corporate accounting rules. The governmental rules are not enforceable by the S.E.C. in any case.

Ms. Walter, who is one of the commissioners appointed by President George W. Bush, said she was sharing her own opinions, not the commission’s. She acknowledged that her views would be unpopular. States and local governments have long resisted regulation by the S.E.C. as an infringement on their sovereignty. When the issue has come up in the past, Congress has shown sympathy for their concerns.

But Ms. Walter said that in her view, the issue should not be one of states’ rights, but one of balancing local interests with the national interest in sound financial markets.

“While we have to make proper allowances for the unique needs of municipal issuers,” she said, “we do not have to tolerate muni investors being treated like second-class citizens.”

She pointed out that local governments were engaging today in complex derivatives transactions “whose risks even sophisticated investors sometimes have trouble understanding.”

She said taxpayers and mom-and-pop investors alike would be increasingly exposed to those risks as older Americans retired and put their life’s savings into municipal bonds.

She said the S.E.C. currently had the legal authority to demand more timely and truthful financial information. But she also recommended changes that would take acts of Congress, like increasing regulatory authority over municipal bond issuers by putting it into a single body together with enforcement.

She proposed legislation that would require “conduit borrowers” — businesses that can issue tax-exempt bonds through their relationships with municipalities — to follow corporate registration and disclosure standards instead of governmental ones.

She also recommended bringing the shadowy financial intermediaries that serve governments into the regulatory framework."

"The Securities and Exchange Commission will likely seek ­legislation “sometime next year” to expand its authority over the municipal market, SEC chairman Mary Schapiro told reporters yesterday after speaking at the Securities Industry and Financial Markets Association’s annual conference in New York.

Legislation is needed to make the level of disclosure by corporate and municipal issuers more equivalent, she said, adding, “Not identical necessarily, but just more equivalent.”

Meanwhile, a California issuer known widely for embracing derivatives as an effective tool for lowering borrowing costs predicted that issuers will likely cease using derivatives in the future because the short-term market has collapsed.

Specifically, Brian Mayhew, chief financial officer of the Bay Area Toll Authority, speaking on a panel, said the market for variable-rate debt that issuers typically issue and then swap to a fixed rate has dried up as a result of the lack of affordable bank liquidity agreements and bond insurance for muni issuers.

“Absent insurance and liquidity, there’s nothing to back these things,” he said, referring to the underlying security on a synthetic fixed-rate swap. “I think you have a very, very limited world of derivatives going forward. At least from my standpoint, and I have $3 billion of [swaps].”

Not all issuers on the panel agreed with Mayhew, with Gene Saffold, chief financial officer of Chicago, saying he is “less pessimistic.”

Alan Anders, deputy director of finance for New York City’s Office of Management and ­Budget, said that the city is considering entering into a derivative, known as a synthetic floater, under which it would issue fixed-rate debt and then swap fixed payments for variable ones.

Anders said the idea is “very appealing.”

Sam Gruer, managing director at Cityview Capital Solutions LLC, who was not at the SIFMA conference, said in an interview that he is aware of several issuers that are considering such arrangements, but does not know of any that have entered into one yet. Still, he said a synthetic floating-rate structure can provide issuers with “attractive” floating-rate funding levels without the relative risks tied to obtaining and renewing bank liquidity facilities.

“Additionally, given the steepness of the yield curve, shorter-dated, fixed-to-floating-rate swaps can still produce attractive floating-rate interest costs while significantly reducing the mark-to-market risk associated with longer dated swaps,” he said."

Source: House shoots for fall Bond Buyer, July 31,2009

"A congressional source said that the Financial Services Committee has no immediate plans to ­impose specific suitability requirements on small governments seeking to engage in derivatives, as was called for in an early blueprint of financial regulatory reform released by the Obama administration...

...The FA bill, which was introduced in May and seeks to place all muni advisers on a level regulatory playing field, would require FAs to register with the SEC and would impose a “fiduciary” standard on them. The congressional source said that lawmakers feel the FA bill, coupled with regulations to impose a fiduciary standard on dealers serving as investment advisers, would adequately ensure that unsophisticated municipalities do not engage in derivatives contracts that they do not understand.

The source said that the FA bill would be considered along with legislation to authorize the Federal Reserve to establish a temporary liquidity facility for variable-rate demand obligations, as well as a third bill to authorize the Treasury Department to run a temporary reinsurance program that would cover all insured municipal credits.

A fourth muni bill, which would require rating agencies to rate municipal bonds more similarly to corporate debt, is likely to be added to legislation designed to increase federal oversight of rating agencies, the congressional source said. A draft of that legislation was sent to lawmakers last week and seeks to mitigate conflicts on interest, increase the transparency of the rating process and reduce investor reliance on ratings."

Tower Amendment

  • Prevents SEC and MSRB from imposing corporate-style registration scheme for muni issuers
  • SEC Rule 15c2-12 does not violate Tower Amendment
  • Post-sale production of official statement
  • Post-sale material events notices and annual reports

Tower Amendment - Sec. 15B(d)(1)

  • Applies to both MSRB and SEC
  • Cannot require issuers, directly or indirectly, to file with either the SEC or MSRB “prior to sale” any application, report, or document in connection with issuance, sale or distribution of the securities

Tower Amendment - Sec. 15B(d)(2)

  • Applies to the MSRB, but NOT the SEC
  • Cannot require issuers, directly or indirectly, to furnish to the MSRB, purchasers, or prospective purchasers any application, report, documents, or information with respect to such issuers
  • Exception - if information available from source other than the issuer

State & local governments fiscal outlook, March 2010

term fiscal challenges which grow over time. Although the sector’s near-term operating balance remains negative, increases in federal grants-in-aid—largely from the Recovery Act—alleviated some near-term pressure. As shown in the insert to the figure below, the March 2010 operating balance measure (including 2009 Recovery Act funds) shows an improvement compared to the January 2009 simulation. In the near-term, the sector’s fiscal position can be attributed to several factors, including steep revenue declines.

GAO projects that the sector’s long-term fiscal position will steadily decline through 2060 absent any policy changes, as shown in figure 1. The decline in the sector’s operating balance is primarily driven by rising health care costs. The fiscal challenges confronting the state and local sector add to the nation’s overall fiscal difficulties. Because most state and local governments are required to balance their operating budgets, the declining fiscal conditions shown in GAO’s simulations suggest the fiscal pressures the sector faces and the extent to which these governments will need to make substantial policy changes to avoid growing imbalances.

GAO testimony on municipal fiscal stresses

This testimony is based largely on GAO’s July 8, 2009 report, in response to a mandate under the American Recovery and Reinvestment Act of 2009 (Recovery Act).

This testimony provides selected updates, including the status of federal Recovery Act outlays. The report addresses:

  1. selected states’ and localities’ uses of Recovery Act funds,
  2. the approaches taken by the selected states and localities to ensure accountability for Recovery Act funds, and
  3. states’ plans to evaluate the impact of Recovery Act funds.

GAO’s work for the report is focused on 16 states and certain localities in those jurisdictions as well as the District of Columbia—representing about 65 percent of the U.S. population and two-thirds of the intergovernmental federal assistance available. GAO collected documents and interviewed state and local officials. GAO analyzed federal agency guidance and spoke with Office of Management and Budget (OMB) officials and with program officials at the Centers for Medicare and Medicaid Services, and the Departments of Education, Energy, Housing and Urban Development, Justice, Labor, and Transportation.

What GAO Recommends

GAO makes recommendations and a matter for congressional consideration discussed on the next page. The report draft was discussed with federal and state officials who generally agreed with its contents. OMB officials generally agreed with GAO’s recommendations to OMB. DOT agreed to and has since addressed GAO’s recommendation.

Rating firms are standardizing rating scales

Municipal debt rankings by Moody’s Investors Service will shift to a global rating system next month that will put the 70,000 state and local bonds it assesses on a scale that’s comparable with corporate securities.

“We are responding to the evolving needs of the market for greater comparability between the ratings of these obligations and those issued by other entities,” Gail Sussman, group managing director at New York-based Moody’s, said in a press release today.

The new ratings don’t “represent a change in our opinion of the credit quality of affected issuers.” U.S. Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, called the different rating scales “ridiculous” at a hearing on the $2.8 trillion market in May 2008.

The Moody’s announcement came a day after Senator Christopher Dodd proposed, as part of the biggest Wall Street regulatory overhaul since the 1930s, that municipalities be assessed in the same manner as companies. The same requirement was included in Frank’s financial-services legislation last year.

“This represents a transfer of money from wealthy investors back to municipalities,” Frank said in a telephone interview. “This recognizes what we have been saying all along.” Lockyer Letter

Municipal bond issuers led by California Treasurer Bill Lockyer began pressing companies that rate their debt two years ago to show investors how they would be assessed on a corporate scale. They said the existing system for ranking state and local obligations led to higher borrowing costs because government issuers default less frequently than higher-rated corporations. The dual rating system cost state taxpayers billions in higher interest rates and at the time forced them to buy bond insurance to obtain top rankings, according to a 2008 letter to rating-company heads from Lockyer and 10 other state treasurers and municipal officials.

California estimated the difference in ratings systems would cost the most-populous state an additional $5 billion on $61 billion of planned bond issues over 30 years.

“We’ll see how the market reacts and how much this move pays off for taxpayers in California and across the country, who have borne the financial burden of an unfair system,” said Tom Dresslar, spokesman for Lockyer, in an e-mailed statement today. “The Moody’s unified scales will produce ratings that more accurately reflect the tiny risk of default of tax-backed municipal bonds.”

Three Levels

Moody’s report on its rating methodology said the move to a global scale will raise long-term state and local government ratings by as much as three levels. The new rankings shouldn’t be viewed as upgrades, the company said. Most housing, health care and “enterprise” sectors of municipal bonds won’t change “because they are already well-calibrated with the global scale,” the report said.

“We’ll have to see what the actual changes are and re- evaluate default statistics and then compare it with similar corporate securities and then we will see whether we’ve achieved parity or not,” said Roger Anderson, executive director of the Princeton-based New Jersey Educational Facilities Authority and a signer of Lockyer’s letter.

“We’ll have to see what the actual increases are issuer by issuer,” he said in a telephone interview.

Moody’s in the past rated state and local bonds based on a separate scale that weighed credit risk within the municipal bond sector. The new municipal system will focus on credit risk based on average levels of default and loss in comparison to other similar debt securities, Moody’s said.

The company said it would phase in the move to the new ratings over four weeks. Dresslar said he hopes that the New York-based companies Standard & Poor’s and Fitch Ratings will also move municipal bonds to a global scale. S&P uses the same rating scale across all the sectors it rates, spokeswoman Ana Sandoval said in an e- mailed statement.

Fitch, which postponed a decision on moving to a global scale because of the collapse of credit markets in 2008 and 2009, may still take action, Richard Raphael, executive managing director of public finance, said in a statement released by spokeswoman Cindy Stoller.

The firm “expects to relay its updated perspectives to the market in the near future,” the statement said.

SEC oversight and rulemaking

The SEC Office of Municipal Securities, which is located in the Division of Trading and Markets, coordinates the SEC's municipal securities activities, advises the Commission on policy matters relating to the municipal bond market and provides technical assistance in the development and implementation of major SEC initiatives in the municipal securities area. In addition, the Office assists the division of Enforcement and other Offices and divisions on a wide array municipal securities matters. The Office works closely with the municipal securities industry to educate state and local officials and conduit borrowers about risk management issues and foster a thorough understanding of the Commission's policies. In addition, it reviews and processes rule filings of the Municipal Securities Rulemaking Board and acts as the Commission's liaison with the MSRB, FINRA and a variety of industry groups on municipal securities issues.

Andrew J. Donohue, Director, Division of Investment Management, U.S. Securities and Exchange Commission, Washington, D.C., May 7, 2010

New SEC Office by October, 2010

The Securities and Exchange CommissionSpeaking about the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Schapiro said the SEC plans to transfer existing staff working on municipal securities to the new office and begin recruiting for a new director who will report to her.

Speaking about the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Schapiro said the SEC plans to launch its new office of municipal securities by the end of October, chairman Mary Schapiro said in prepared testimony presented to the Senate Banking Committee Thursday...

...Meanwhile, as the SEC moves forward with establishing its new office of municipal securities, it has already hired the head-hunting firm Korn/Ferry International to find candidates to lead the office. The firm is primarily looking for candidates outside the commission who have broad-based managerial experience, according to market participants familiar with the matter and a nine-page, confidential Korn/Ferry document obtained by The Bond Buyer.

Currently, the muni office is housed within the SEC’s division of trading and markets and has only two permanent, full-time employees — Martha Mahan Haines, its chief, and Mary Simpkins, senior special counsel.

SEC to hold muni roundtables

The Securities and Exchange Commission will kick off its much-awaited series of hearings on the municipal market this month, holding the first on Tuesday, Sept. 21, in San Francisco.

The hearing will be one of at least five, with others to be held in Chicago, Washington, D.C., Tallahassee, and Austin, according to the SEC’s announcement. They will be followed by a staff report summarizing the lessons learned and making possible recommendations for regulatory and legislative changes, as well as the best practices that market participants could adopt, the agency said.

The hearings will include local market participants and will examine such issues as the Municipal Securities Rulemaking Board, Build America Bonds, investor protection and education, financial reporting and accounting, market stability and liquidity, municipalities as conduit borrowers, offering participants, professionals and market intermediaries, and Section 529 college savings plans, the SEC said.

But some market participants are already criticizing or raising questions about the first hearing’s agenda, which will feature opening remarks by SEC officials and five panels of speakers from the muni market.

“This is really a questionable way to conduct a public hearing, to pre-decide who’s going to speak,” said one market participant who did not want to be identified. “It should be open to the public. That’s the basic Administrative Procedures Act procedure for a public hearing.”

SEC requires registration of muni advisors

Source: *SEC Sets Rule for Muni FAs Bond Buyer, September 3, 2010

The Securities and Exchange Commission Thursday announced that it has adopted a temporary rule requiring municipal advisers to register with it by Oct. 1 to comply with the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.

“We have acted expeditiously to create a temporary registration system to gather key data and provide transparency about municipal advisers,” SEC chairman Mary L. Schapiro said in a press release. “As a result, regulators, investors, and state and local governments will have a much better understanding of those who provide services in the municipal market.”

The temporary rule is effective Oct. 1 through Dec. 31, 2011. The SEC said it expects to implement a permanent rule later this year. The commission is seeking public comments on the temporary rule and asks that they be submitted within 30 days after the temporary rule is published in the Federal Register later this week or next week...

...The temporary rule applies to all municipal advisers who provide advice to state and local governments and other borrowers involved in the issuance of municipal securities. The advice may be related to derivatives, guaranteed investment contracts, investment strategies, or the issuance of municipal securities. It also applies to advisers who solicit business from a state or local government for a third party.

The SEC estimates about 1,000 municipal advisers will be required to complete the form. It said advisers should begin registering as soon as possible because of the fast-approaching Oct. 1 deadline. Under the new law, advisers must be registered by that date to continue their muni advisory services.

The commission has provided a temporary registration form for municipal advisers on its website...

...The definition specifically includes financial advisers, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and swap advisers that provide municipal advisory services.

The definition does not include: a broker, dealer, or municipal securities dealer serving as an underwriter; a registered investment adviser registered under the Investment Advisers Act of 1940 or associated persons; commodity trading advisers registered under the Commodity Exchange Act or persons associated with them who provide advice related to swaps; attorneys offering legal advice or providing traditional services; or engineers providing advice.

The temporary rule also contains definitions of associated municipal adviser professionals and affiliates, as well as associated persons of a municipal adviser.

The rule defines a municipal entity as including a state or local government or political subdivision, a municipal corporate instrumentality, or any plan, program or pool of assets sponsored or established by the state or local political subdivision or municipal corporate instrumentality. Municipal financial products are defined as muni derivatives, GICs and investment strategies.

A solicitation of a municipal entity or obligated person is defined as “a direct or indirect communication with a municipal entity or obligated person made by a person, for direct or indirect compensation, on behalf of a broker, dealer, municipal securities dealer, municipal adviser, or investment adviser … that does not control, is not controlled by, or is not under common control with the person undertaking such solicitation for the purpose of obtaining or retaining an engagement.”

SEC seeks to ban dual role by underwriters

The head lobbyist for U.S. regional bond dealers said a proposal to prevent banks from both advising on and underwriting municipal deals may raise financing costs for small towns and school districts.

They might not be able to get enough bidders for their debt, Mike Nicholas, chief executive officer of the Washington- based Regional Bond Dealers Association, said today. The Municipal Securities Rulemaking Board, which this week proposed a ban, should allow firms to serve in a dual role in some cases, such as competitive auctions of debt, he said.

Mary Schapiro, the chairman of the U.S. Securities and Exchange Commission said May 7 that she wants to stop the practice, calling it an inherent conflict of interest. It can lead firms to recommend transactions that aren’t suitable or that aren’t offered at the best price, she said.

“If the chairman of the SEC is making a strong case for a change in practices, issuer-underwriter practices, it’s tough to see how that’s not going to happen,” Nicholas said in an interview in New York. “We’re looking forward to working with the SEC and MSRB on making sure it’s done in a conscientious way.”

The rulemaking board devises regulations for the industry; the SEC enforces them.

Unlike corporations, many local governments don’t have employees who specialize in raising capital, forcing them to rely on finance firms for advice on borrowing in the $2.8 trillion municipal bond market.

Negotiating Deals

About 80 percent of the market is “negotiated” -- governments agree in advance to sell the securities to a preselected underwriter -- so dealers have an interest in exclusive relationships with municipalities. In a negotiated sale, prices and interest rates are set by the underwriter, rather than by banks at a competitive auction.

Barring dealers from working as advisers on competitive deals and then bidding on the bonds might raise borrowing costs for small issuers by limiting competition to buy the debt, Nicholas said.

“They have fewer firms that want to come in and underwrite that $7 million issue for fire trucks for Brownsville, Maryland,” said Nicholas. “We hear stories all the time of issuers that can’t get bids.”

He wasn’t able to immediately identify them.

Pause for Safety

Safeguards could be established to prevent firms that advise municipalities from getting an inside track on bond auctions by giving other firms time to analyze a deal’s structure, said William Daly, senior vice president of government relations at the RBDA, which represents 25 firms, including Fifth Third Securities Inc. of Cincinnati, First Southwest Co. of Dallas and Raymond James & Associates of Saint Petersburg, Florida.

The chance that even the smallest municipality with an investment-grade credit rating couldn’t get bidders for a bond is remote, said Robert Doty, a municipal finance adviser at American Governmental Services in Sacramento, California. If financial advisers aren’t getting bids for debt, they’re not doing their job, he said.

If a bond is put out for a competitive bid and it’s ratable, “the buyers will just line up,” said Doty, who has advised on bond issues for Wyoming. “These little tiny issuers have no source of information except the guys who are feeding it to them. If the firm says, ‘Oh well, we can’t find bidders’, the community has no choice but to believe them.”

Prohibiting firms from serving as underwriter and adviser on the same deal won’t limit local governments’ options, Doty said. Instead, it will force the adviser to serve the issuers’ best interest rather than the best interests of the dealers’ sales force.

New Jersey settles SEC fraud claims over $26B in bonds

New Jersey settled claims that it misled investors in $26 billion of municipal bonds by masking underfunding of its two biggest pension plans, in the first Securities and Exchange Commission case to target a state.

Documents for 79 bond offerings from 2001 to 2007 “created the false impression” that the Teachers’ Pension and Annuity Fund and the Public Employees’ Retirement System were adequately funded, hiding that the state couldn’t make contributions without raising taxes or cutting services, the SEC said in a statement today.

“This is an area of concern,” Elaine Greenberg, head of the SEC’s municipal securities and public pension fund unit, said today in a telephone interview. “We hope to alert other states and municipalities of their disclosure obligations under the federal securities laws as it pertains specifically to their pension fund liabilities.”

The suit marks the first time the SEC has sued a state for violating federal securities laws and marks an early salvo in the agency’s plan to crack down on fraudulent practices in the $2.8 trillion municipal bond market.

SEC approves the MSRB rule change on priority of orders in primary offerings

On August 13, 2010, the Securities and Exchange Commission (SEC) approved the MSRB’s proposed rule change[1] on priority of orders in primary offerings.[2] The rule change consists of amendments to MSRB Rules G-8, G-9, and G-11, as well as an interpretive notice under Rule G-17, as set forth below.

Rule G-11 is amended so that it applies to all primary offerings, whether or not a syndicate has been formed. Underwriters are required by amended Rule G-11(e) to give priority to customer orders over orders for their own accounts or orders for their related accounts, to the extent feasible and consistent with the orderly distribution of securities in the offering or unless otherwise agreed to by the issuer. Syndicate managers are also permitted to deviate from this customer priority rule if it is in the best interests of the syndicate to do so. Under amended Rule G-11(a)(xi), the term “related account” includes a municipal securities investment portfolio of an underwriter or an affiliate, an arbitrage account of an underwriter or an affiliate, a municipal securities investment trust sponsored by an underwriter or an affiliate, or an accumulation account established in connection with such a municipal securities investment trust. Amended Rule G-11(e)(x) provides that the term “affiliate” means a person controlling, controlled by, or under common control with an underwriter. To assist underwriters in understanding which orders are, in fact, customer orders, amended Rule G-11(b) requires all dealers that submit orders to underwriters disclose whether their orders are for their own account or related accounts.

The new interpretive notice replaces prior MSRB guidance on priority of customer orders.[3] The new notice provides that Rule G-17 requires that underwriters give priority to orders from customers over orders from underwriters or their respective related accounts, unless certain specific exceptions apply. Those exceptions parallel those in amended Rule G-11(e). The notice also provides that underwriters that fail to follow issuers’ directions concerning retail order periods may violate Rule G-17.

To assist in the enforcement of these customer priority rules, amended Rule G-8(a)(viii) requires syndicate managers and sole underwriters to keep records of: (i) whether there was a retail order period and the issuer’s definition of “retail,” if applicable and (ii) whether they deviated from the customer priority provisions and the reasons for doing so. Finally, amended Rule G-9(a)(iv) requires that underwriters retain records of all orders, whether filled or unfilled, for a period of six years.

The rule change is effective for new issues of municipal securities for which the Time of Formal Award (as defined in Rule G-34(a)(ii)(C)(1)(a)) occurs after October 12, 2010.

Questions about the rule change may be directed to Peg Henry, Deputy General Counsel, at 703-797-6625.

SEC approves changes to enhance municipal disclosure

Rule 15c2-12 prohibits brokers, dealers, and municipal securities dealers from purchasing or selling municipal securities unless they reasonably believe that the state or local government issuing the securities has agreed to disclose such things as annual financial statements and notices of certain events, such as payment defaults, rating changes and prepayments.

The Amended Rule will …

Expand the Rule to Cover Additional Municipal Securities – When it was first adopted, Rule 15c2-12 specifically did not apply to certain securities commonly known as variable rate demand obligations or VRDOs. Under the amendment, the rule will apply to new issuances of such securities. VRDOs bear interest at a rate that is reset periodically and investors are able to sell them back to the issuer at certain times for their full value.

Improve Disclosure of Tax Risk — The amended rule will specifically include disclosure of events that may adversely affect a bond’s tax exemption, including issuance by the IRS of proposed and final decisions about whether the bond can be taxed. Strengthen and Expand Disclosure of Important Events — Under the existing rule, an underwriter must have a reasonable belief that the state or local government that issued municipal bonds has agreed to provide ongoing, continuing disclosure of certain important events.

The existing rule presently provides that notice of all of the listed events need be made only “if material.” The amended rule will eliminate the need for a materiality determination for the following events:

  1. failure to pay principal and interest;
  2. unscheduled payments out of debt service reserves reflecting financial difficulties;
  3. unscheduled payments by parties backing the bonds, reflecting financial difficulties, or a change in the identity of parties backing the bonds or their failure to perform;
  4. defeasances, including situations where the issuer has provided for future payment of all obligations under a bond; and
  5. rating changes.

A materiality determination would be retained for some events, including, for example, bond calls.

The amendments also increase the number of events to include:

  1. tender offers;
  2. bankruptcy, insolvency, receivership or similar proceeding;
  3. mergers, consolidations, acquisitions, the sale of all or substantially all of the assets of the obligated person or their termination, if material; and
  4. appointment of a successor or additional trustee or the change of the name of a trustee, if material.

Establish a More Specific Filing Deadline — The amended rule will provide that notices of the events listed in the rule be disclosed in a timely manner not more than 10 business days after the event.

Currently, the rule simply provides for disclosure “in a timely manner.”

Additional Guidance — Over the years, the Commission has set forth interpretations under the antifraud provisions of the federal securities laws to require municipal securities underwriters to have a reasonable basis for recommending any municipal securities. The adopting release reaffirms that, to have a reasonable basis to recommend a security, a municipal underwriter must carefully evaluate the likelihood that a municipality will make the ongoing disclosure called for by the amended rule. The adopting release further states that it is doubtful that an underwriter could form a reasonable basis to recommend a security if the municipality had a history of persistent and material non-disclosure.

SEC and IRS to work more closely on municipal bond enforcement

The Securities and Exchange Commission and the Internal Revenue Service today announced that the two agencies agreed to work more closely to monitor and regulate the municipal bond market and industry.

SEC Chairman Mary Schapiro and IRS Commissioner Doug Shulman today signed a Memorandum of Understanding (MOU) designed to improve compliance with SEC and IRS rules and regulations related to municipal securities. The muni bond market currently totals about $2.8 trillion in outstanding securities and continues to grow in complexity and size.

"Through cooperative relationships like this, we are better positioned to protect investors and ensure they are getting the information they need when investing in municipal securities," Schapiro said.

"This memorandum reflects the commitment both agencies have in using all means possible to ensure the municipal bond market operates in accordance with all the laws that govern it," Shulman said.

The SEC and IRS will work cooperatively to identify issues and trends related to tax-exempt bonds in the municipal securities industry and to develop strategies to enhance performance of their respective regulatory responsibilities. To support this effort, the two agencies will work through a standing Tax Exempt Bond/Municipal Securities Committee to discuss policy, procedures and compliance issues.

The SEC and IRS will also share information as appropriate regarding market risks, practices and events related to municipal securities, among other things. In addition, the two agencies will collaborate on educational and other types of outreach efforts.

SEC muni office to seek outside experts

The Securities and Exchange Commission wants to hire outside municipal market experts, including traders and investment bankers, to work in its reconstituted municipal and public pension fund enforcement unit, Elaine Greenberg said Friday.

Greenberg, an associate regional director in the SEC’s Philadelphia office who is heading the new unit, said in an interview that the commission is just beginning the process of staffing up the unit, which was formally created in January along with four other specialized enforcement units. The new units will create a much more structured and rigorous for process SEC officials to pursue muni cases.

Greenberg could not say how large the unit will become, though its deputy chief is Mark Zehner, a regional municipal securities counsel who also works out of the Philadelphia office.

Greenberg told securities attorneys gathered here for the annual Practising Law Institute’s “SEC Speaks” conference that despite the size and importance of the muni market, it is “very thinly regulated,” and one of few methods of policing it is through an enhanced enforcement response using the SEC’s antifraud authority.

To that end, she said, the new enforcement unit will focus on developing strong cases about particular conduct, “cases that will have an impact on the behavior of market participants and will have a high deterrent effect.”

Closely mirroring comments she made last month when the new unit was formally announced, Greenberg said: “Through the unit we plan to build a comprehensive municipal securities and public pension enforcement program where we will develop the case law and legal precedent through the high-impact cases that we bring.”

She added that the SEC staff will “actively seek the market activities that pose the greatest risk of harm to investors and are indicative of potential violations.”

She said the unit will be focused on five areas of misconduct: offering and disclosure fraud; tax or arbitrage-driven misconduct; pay-to-play and public corruption violations; public pension accounting and disclosure violations; and valuation and pricing fraud.

SEC requires muni underwriters to reveal campaign aid

Municipal securities underwriters will have to disclose contributions to political campaigns in support of state and local government bond proposals under a rule approved by the U.S. Securities and Exchange Commission.

The requirement, intended to curb possible conflicts of interest, was proposed by the Alexandria, Virginia-based Municipal Securities Rulemaking Board, which sets policy for the $2.8 trillion U.S. municipal bond market. Bond elections allow local residents to approve or reject the issuance of debt.

The disclosures will allow “the public and regulators to monitor dealer contributions to bond ballot campaigns” with the aim of “reducing pay-to-play practices in the municipal securities market,” the SEC said in an order signed yesterday by Deputy Secretary Florence Harmon.

Underwriters in some states help school districts and other municipal borrowers win voter approval for bonds and then seek to be hired as underwriters. The new requirement will apply to so-called in-kind election services as well as to direct cash contributions. The MSRB already restricts campaign contributions by underwriters to elected officials who control their hiring.

MSRB notice

The Securities and Exchange Commission has approved amendments to Rules G-37 and G-8 to require the disclosure of certain contributions to bond ballot campaigns made by dealers, municipal finance professionals, their political action committees, and non-MFP executive officers on MSRB Form G-37, and to require dealers to create and maintain records of non-de minimis contributions to bond ballot campaigns. The amendments become effective on February 1, 2010.

SEC hearing on municipal underwriting

Open Meeting on Wednesday, July 15, 2009 at 10:00 a.m., in the Auditorium, Room L-002.

The subject matter of the Open Meeting will be:

The Commission will consider a recommendation regarding amendments to Rule 15c2-12 ("Rule") under the Securities Exchange Act of 1934 ("Act"), concerning the responsibilities of a broker, dealer, or municipal securities dealer acting as an underwriter in a primary offering of municipal securities and interpretive guidance intended to assist municipal securities issuers, brokers, dealers and municipal securities dealers in meeting their obligations under the antifraud provisions of the Act.

MSRB Files Disclosure Proposals Bond Buyer, July 14, 2009

SEC Rule 15c2-12


On July 15, 2009, the SEC approved proposed amendments to its Rule 15c2-12 (Rule). The SEC has proposed that these amendments, in their final form following public comment, will become effective the third month following the approval of the final changes to the Rule. These proposed amendments are the first significant overhaul of the Rule since the base version, which was adopted in 1989, was amended in 1994 to include secondary market disclosure requirements. These amendments will have significant implications for municipal issuers and borrowers of the proceeds of municipal bonds. The effects of these amendments are outlined in this alert.

Rule 15c2-12 provides the basic framework for secondary market disclosure by issuers and borrowers in the municipal bond market. The SEC lacks statutory jurisdiction over municipal issuers, other than limited, but significant, jurisdiction and oversight that derives from anti-fraud laws, including SEC Rule 10b-5. As a consequence, the SEC's approach to regulating secondary market disclosure by municipal issuers and the borrowers of the proceeds of municipal bonds is to impose mandates on broker-dealers, in their various roles as underwriters, placement agents, and remarketing agents, to conduct their business and discharge their general securities law obligations in a manner consistent with Rule 15c2-12.

The Rule has two basic requirements. First, it obligates underwriters to obtain and review offering documents for municipal securities (if available) and file them with the Municipal Securities Rulemaking Board (MSRB).1 Second, it obligates underwriters and remarketing agents to ensure that issuers and borrowers have in place contractual obligations for the benefit of bondholders to prepare and file annual reports and financial information, and notices of the occurrence of certain described events (referred to as “listed events”) with the MSRB, through its Electronic Municipal Market Access (EMMA) system. A few categories of issuers and types of securities are currently exempted from the application of the Rule.

The timing of the proposed amendments is notable. The announcement of the amendments occurred at substantially the same time that the SEC and MSRB have pending other regulatory actions that also would serve to increase the quality and quantity of disclosure, and as legislators and regulatory agency leaders are increasingly criticizing the lack of jurisdiction over disclosure by municipal issuers. The announcement of the amendments also follows on the heels of the MSRB's recent implementation of its EMMA system.

Public comments by organizations as diverse as the National Federation of Municipal Analysts, the Investment Company Institute, and the Government Finance Officers Association have increasingly questioned the existing quality of disclosure. At the same time, the public policies surrounding exemption versus registration also continue to fuel the debate. Moreover, SEC Commissioner Mary Schapiro has delivered testimony and offered public statements that recommend legislative action toward removing or modifying the exemption in order to improve transparency in the municipal securities market.

In addition, the SEC recently announced changes in its enforcement division, which include the creation of a national enforcement unit specializing in municipal securities and public pensions. All of these developments must be considered in the context of the recent global financial crisis and recession, both of which have predictably resulted in the current political environment. This environment has led to intensified discussion surrounding the transparency and adequacy of disclosure in the municipal marketplace, which may lead to more substantial regulatory and statutory protection for investors and consumers beyond the proposed changes to the Rule described in this alert.

Thus, while the amendments to Rule 15c2-12, if adopted, will clarify and increase disclosure obligations, the likely investor demand for more frequent and improved quantity and quality of disclosure, together with the increasing level of public debate on the subject, will impose more pressure upon issuers and borrowers to enhance their current secondary market disclosure practices.

U.S. probe lays out bid fixing

The Justice Department’s antitrust investigation has found dozens of firms and individuals conspired for at least six to eight years to secretly control the bidding for municipal bond investment and other contracts in more than 250 transactions, according to documents filed with a federal court in Manhattan.

The department has identified 25 entities and 30 individuals as co-conspirators in the scheme, Rebecca Meiklejohn, the department’s lead antitrust attorney in the case, told Judge Victor Marrero, of the U.S. District Court for the Southern District of New York, in a recent five-page letter that included several exhibits.

Meiklejohn did not name the individuals and firms, but included along with the Feb. 17 letter a list of transactions dating from July 20, 1998, through June 24, 2004, that she indicated were allegedly affected by the bid-rigging.

Bloomberg and other news organizations reported Friday that a document filed with the court Wednesday, but later sealed at the request of the firms, listed JPMorgan Chase & Co., Lehman Brothers Holdings Inc., and UBS AG among more than a dozen firms involved in the conspiracy.

The documents were filed in the Justice Department’s case against Beverly Hills-based investment broker CDR Financial Products Inc. and three of its current and former officials.

A federal grand jury indicted the firm, its founder David Rubin, its former financial officer Zevi Wolmark, and vice president Evan Andrew Zarefsky last October on criminal antitrust, wire fraud and other charges stemming from the alleged conspiracy to rig bids for municipal investment and derivatives contracts for undisclosed kickbacks disguised as fees. They pleaded not guilty in November. A trial has been scheduled for next year.

Documents filed earlier this year as part of plea agreements that the Justice Department reached with other former CDR officials cite transactions affected by bid-rigging schemes through November 2006, when the federal officials raided CDR and at least two other investment brokers.

In her Feb. 17 letter to Marrero, Meiklejohn said that, during its investigation, the federal government received recorded conversations from eight financial institutions, grouped by employee and identified by date and time of call. Some of the convervsations are for a period of only a few months, while others span several years.

In addition, the government has roughly 100 interview reports from seven current or former CDR employees as well as approximately 2,000 tape-recorded conversations from third parties, in which the government has identified a CDR employee as one of the speakers, she said. It also has data seized or otherwise obtained from CDR.

The testimony at the trial “will establish, in essence,” that CDR and its three current and former officials “secretly manipulated and controlled the bidding for contracts involving the proceeds of municipal bonds and other related contracts, to favor particular providers and that this conduct cheated the municipal issuers that were CDR’s clients and the Internal Revenue Service,” Meiklejohn told Marrero.

The trial has been scheduled for Feb. 7, 2011, but at a status conference held in the district court Friday, lawyers for the defendants pushed for a later trial date, complaining they will have difficulty examining the massive amount of data they were given by the Justice Department.

They said that “buckets” of information on the 250 deals contain 125 million pages and 670,000 audio recordings. They also pointed out the department itself has been reviewing the information for seven years and still is not finished.

Meiklejohn argued they do not need to read every page. In most cases, a word-search would be enough to find what they were looking for, she said.

Marrero said the defense’s concerns were “wrapped in a fair amount of hyperbole.” Still, he expressed sympathy, and suggested he might be willing to push back the February trial date by no more than a month or two. The next status conference is scheduled for May 14.

Meiklejohn described the contents of one of the “buckets” of information in her Feb. 17 letter to Marrero. It contained evidence related to some single-family mortgage revenue bonds, Series D, that were issued by the Utah Housing Corp. in 2001. The issuer had two investment agreements for which CDR handled the bidding on Aug. 7, 2001, Meiklejohn said.

The bucket, she said, contains evidence showing Zarefsky speaking to an investment provider, about the time the bids were due. Though Zarefsky was supposed to be brokering a competitive bid for the investment contract, he tells the provider, “I can actually probably save you a couple of bucks here.” He tells the provider he can lower the rates he initially quoted.

Bond documents for the transaction show that Lehman Brothers was the senior underwriter for the transaction and that Lehman Brothers Financial Products, Inc. was the “interest rate contract” provider.

8th guilty plea in bid-rigging probe

A former JPMorgan Chase & Co. banker became the eighth person to plead guilty to rigging investment contracts and derivatives in a federal antitrust investigation of the $2.8 trillion municipal-bond market.

James L. Hertz, whom the Justice Department said worked for a Manhattan-based financial institution that it didn’t name, pleaded guilty to bid-rigging, fraud and conspiracy charges, according to a department news release. He also agreed to cooperate with prosecutors. Hertz, 53, a Cranford, New Jersey, resident, was employed at New York-based JPMorgan from 1994 through 2008, according to records filed with the Financial Industry Regulatory Authority.

Muni issuers say 120 days isn’t sufficient for disclosure

"State and local governments borrowing in the $2.72 trillion municipal bond market say they can’t file annual reports within 120 days of yearend.

The U.S. Securities and Exchange Commission, attempting to make municipal disclosure more like the corporate market, proposed in July that issuers voluntarily file audited financials within 120 days. Those making that deadline would be identified to investors on the Municipal Securities Rulemaking Board’s Electric Municipal Market Access Web site as taking steps to speed up disclosure.

More than 80 percent of the 21 responses borrowers and their associations filed with the SEC said a 120-day standard is unworkable because accountants are unavailable and the time is inadequate to assemble necessary information. Under current rules, issuers decide how long they have to report to investors, which means it often takes investors at least six months to get annual audited financials.

“The 120-day standard is simply unattainable,” wrote the Portland, Oregon, chief administrative officer, Kenneth Rust, and debt manager, Eric Johansen. “There are not a sufficient number of independent auditors available to conduct the auditing function within the 120-day period.”

Investors and SEC officials including Chairman Mary Schapiro have said investors need more information because of the risk tied to the rising volume of municipal bond defaults. They increased to $7.77 billion in 2008 from $349 million in 2007, according to the Distressed Debt Securities Newsletter, which monitors defaults. So far this year, $4.05 billion of municipal debt hasn’t met its terms...

...Under U.S. securities law, the federal government can’t require municipal bond issuers to disclose. The SEC requires banks that sell or underwrite municipal securities to contract with issuers to provide limited disclosure. The MSRB makes the rules, which are enforced by the SEC and Financial Industry Regulatory Authority, which oversees securities dealers.

There hasn’t been much enforcement of current disclosure rules, according to DPC Data. The firm found in a study last year that about one-fourth of issuers failed to file required disclosure for three or more years."


See more information here Municipal Securities Rulemaking Board.

EMMA disclosure system

See also EMMA.

The Electronic Municipal Market Access system, or EMMA, is a comprehensive, centralized online source for free access to municipal disclosures, market transparency data and educational materials about the municipal securities market.

EMMA was established to increase the broad comprehensive access to vital disclosure and transparency information in the municipal securities market.

EMMA provides investors with key information about municipal securities, free of charge. The information on EMMA is presented in a manner specifically tailored for retail, non-professional investors who may not be experts in financial or investing matters. EMMA is the sister to the SEC's corporate disclosure system, EDGAR.

EMMA is maintained by the Municipal Securities Rulemaking Board (MRSB).

See also:

Municipal securities markets

See municipal securities markets.

"...The size of the municipal market reflects its significance to the economy. In 2009, there were approximately $2.8 trillion of municipal securities outstanding. Much of that amount is held directly or indirectly by retail investors. Individuals directly hold about 35 percent of the outstanding municipal securities, and another 34 percent is held by money market funds, mutual funds, and closed end funds on behalf of primarily retail investors.

But, the municipal market is not solely the province of buy-and-hold investors. Trading in this market has been substantial. In 2009, almost $3.8 trillion of long and short term municipal securities were traded in over 10 million transactions..."

Municipal securities prosecutions

See also muni swaps.

SEC charges New Jersey for fraudulent municipal bond filings

The Securities and Exchange Commission (SEC) has charged the State of New Jersey with securities fraud for misrepresenting and failing to disclose to investors in billions of dollars worth of municipal bond offerings that it was underfunding the state's two largest pension plans.

According to the SEC's order, New Jersey offered and sold more than $26 billion worth of municipal bonds in 79 offerings between August 2001 and April 2007. The offering documents for these securities created the false impression that the Teachers' Pension and Annuity Fund (TPAF) and the Public Employees' Retirement System (PERS) were being adequately funded, masking the fact that New Jersey was unable to make contributions to TPAF and PERS without raising taxes, cutting other services or otherwise affecting its budget. As a result, investors were not provided adequate information to evaluate the state's ability to fund the pensions or assess their impact on the state's financial condition.

New Jersey is the first state ever charged by the SEC for violations of the federal securities laws. New Jersey agreed to settle the case without admitting or denying the SEC's findings.

"All issuers of municipal securities, including states, are obligated to provide investors with the information necessary to evaluate material risks," said Robert Khuzami, director of the SEC's division of enforcement. "The State of New Jersey didn't give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation."

Elaine C. Greenberg, Chief of the SEC's Municipal Securities and Public Pensions Unit, added, "Issuers of municipal bonds must be held accountable when they seek to borrow the public's money using offering documents containing false and misleading information. New Jersey hid its financial challenges from the very people who are most concerned about the state's financial health when investing in its future."

The SEC's order finds that New Jersey made material misrepresentations and omissions about the underfunding of TPAF and PERS in such bond disclosure documents as preliminary official statements, official statements, and continuing disclosures. Among New Jersey's material misrepresentations and omissions:

  • Failed to disclose and misrepresented information about legislation adopted in 2001 that increased retirement benefits for employees and retirees enrolled in TPAF and PERS.
  • Failed to disclose and misrepresented information about special Benefit Enhancement Funds (BEFs) created by the 2001 legislation initially intended to fund the costs associated with the increased benefits.
  • Failed to disclose and misrepresented information about the state's use of the BEFs as part of a five-year "phase-in plan" to begin making contributions to TPAF and PERS.
  • Failed to disclose and misrepresented information about the state's alteration and eventual abandonment of the five-year phase-in plan.

The SEC's order further finds that New Jersey failed to provide certain present and historical financial information regarding its pension funding in bond disclosure documents. The state was aware of the underfunding of TPAF and PERS and the potential effects of the underfunding.

Furthermore, the state had no written policies or procedures about the review or update of the bond offering documents and the state did not provide training to its employees about the state's disclosure obligations under accounting standards or the federal securities laws. Due to this lack of disclosure training and inadequate procedures for the drafting and review of bond disclosure documents, the state made material misrepresentations to investors and failed to disclose material information regarding TPAF and PERS in bond offering documents.

The SEC's order requires the State of New Jersey to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. New Jersey consented to the issuance of the order without admitting or denying the findings. In determining to accept New Jersey's offer to settle this matter, the Commission considered the cooperation afforded the SEC's staff during the investigation and certain remedial acts taken by the state.

Third guilty plea in muni bond bid rigging national scheme

United States Attorney's Office, Southern District of New York, Contact: (212) 637-2600

WASHINGTON — A third former employee of Rubin/Chambers, Dunhill Insurance Services Inc., also known as CDR Financial Products (CDR), pleaded guilty today to his participation in bid-rigging and fraud conspiracies related to contracts for the investment of municipal bond proceeds and other related municipal finance contracts, the Department of Justice announced. CDR is a Beverly Hills, Calif.-based financial products and services firm.

According to the charges filed today in the U.S. District Court in Manhattan, Douglas Alan Goldberg of Chatsworth, Calif., engaged in separate bid-rigging and fraud conspiracies with companies that provide a type of contract, known as an investment agreement, to state, county, and local governments and agencies throughout the United States. The public entities were seeking to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects. Goldberg also pleaded guilty to one count of wire fraud. According to the plea agreement, Goldberg has agreed to cooperate with the ongoing investigation.

The department said in court documents that CDR was hired by public entities that issue municipal bonds to act as their broker and conduct what was supposed to be a competitive bidding process primarily for contracts for the investment of municipal bonds proceeds. Competitive bidding for those contracts is the subject of regulations issued by the U.S. Department of the Treasury and is related to the tax-exempt status of the bonds.

Goldberg admitted that, as a part of the bid-rigging conspiracy, from at least as early as 1998 until at least November 2006, he and other co-conspirators designated in advance which co-conspirator providers would be the winning bidder for certain investment agreements and submitted or caused to be submitted to CDR intentionally losing bids. According to the court documents, kickbacks in the form of fees that were inflated or unearned were paid to CDR in exchange for assistance from Goldberg and other CDR co-conspirators in controlling the bidding process and ensuring that certain co-conspirator providers won the bids they were allocated.

As a part of the fraud conspiracy, from as early as August 2001 until at least November 2006, Goldberg and others gave a co-conspirator provider information about the prices, price levels or conditions in competitors’ bids, a practice known as a “last look,” which is explicitly prohibited by U.S. Treasury regulations. As a result of the information, the co-conspirator provider won contracts at artificially determined price levels. In exchange for giving the provider information, CDR requested and received kickbacks from the provider and relied on the provider to submit intentionally losing bids when requested on other contracts.

This is the third guilty plea to arise from an ongoing investigation into the municipal bonds industry, which is being conducted by the Antitrust Division’s New York Field Office, the FBI and Internal Revenue Service Criminal Investigation. On Feb. 23, 2010, Daniel Moshe Naeh, also known as Dani Naeh, a former CDR employee, pleaded guilty to bid-rigging and fraud conspiracies and to one count of wire fraud. On March 11, 2010, Matthew Adam Rothman, also a former CDR employee, pleaded guilty to bid-rigging and fraud conspiracies and to one count of wire fraud. The department is coordinating its investigation with the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York.

On Oct. 29, 2009, CDR along with its owner and president, David Rubin; its former chief financial officer and managing director, Zevi Wolmark, also known as Stewart Wolmark; and its vice president Evan Andrew Zarefsky, were indicted and charged with participating in bid-rigging and fraud conspiracies. The trial for CDR, Rubin, Wolmark, and Zarefsky is scheduled to begin on Feb. 7, 2011.

The bid-rigging conspiracy with which Goldberg is charged carries a maximum penalty of 10 years in prison and a $1 million fine. The fraud conspiracy with which Goldberg is charged carries a maximum penalty of five years in prison and a $250,000 fine. The wire fraud charge with which Goldberg is charged carries a maximum penalty of 20 years in prison and a $250,000 fine. The maximum fines for each of these offenses may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

Anyone with information concerning bid rigging and related offenses in any financial markets should contact the Antitrust Division’s New York Field Office at 212-264-0390 or visit, or the FBI at 212-384-5000.

An ex-CDR Financial Products Inc. worker pleaded guilty to conspiring to rig bidding on investment contracts sold to local governments, prosecutors said.

Daniel Naeh pleaded guilty on Feb 23 in federal court in Manhattan, admitting he engaged in fraud schemes with companies that provide instruments municipalities use to invest the proceeds of bond issues. Naeh, who lives in Israel, agreed to cooperate in the federal probe, the U.S. Justice Department said yesterday in a statement.

CDR, founder David Rubin and two other employees of the advisory firm were indicted in October by a federal grand jury for conspiring to rig bids on investment contracts sold to states, cities and other government agencies. Naeh is first person to plead guilty in the probe, which lasted more than three years and has drawn in dozens of banks including JPMorgan Chase & Co. and Bank of America Corp.

“If I were Rubin and the other guys, I’d be sweating it,” said Christopher “Kit” Taylor, who was the executive director of the Municipal Securities Rulemaking Board, the national regulator of the municipal bond market, from 1978 to 2007. “They get CDR, they get everybody else in the industry.”

CDR and its employees, who ran the auctions for the investment work, awarded deals to favored firms in exchange for kickbacks, according to the indictment. The government alleges that the conspiracy cost taxpayers by allowing the banks to pay below-market rates.

Rubin, former CDR Chief Financial Officer Z. Stewart Wolmark and Evan Zarefsky, a former vice president, have pleaded not guilty.

‘Without Merit’

CDR faces a fine of as much as $100 million, the U.S. has said. The charges are “without merit and in fact, a total fiction based on a lack of understanding of the municipal reinvestment market,” CDR said in a statement on its Web site. Susan Hoffinger, a lawyer for Naeh, didn’t immediately return a call seeking comment yesterday.

Trinity Funding Co., a unit of General Electric Co. and Financial Security Assurance Holdings Ltd., a former subsidiary of Belgian bank Dexia SA, were two unnamed companies that allegedly conspired with CDR to rig auctions, people familiar with the matter said on Nov. 18.

CDR was hired by local governments to conduct auctions for investments purchased with bond proceeds until the money was needed to pay for construction projects or used to retire old bonds as they come due.

From as early as August 2001 until at least November 2006, Naeh gave an unnamed co-conspirator at a bank information about competitors’ bids, the Justice Department said.

Last Look

The practice, known as a “last look,” is prohibited by U.S. Treasury regulations that require states and local governments to get bids from at least three “reasonably competitive providers,” of investment agreements.

According to an antitrust lawsuit filed last year, Naeh shared information about a bid in July 2002 for the Tampa Port Authority in Florida with Dean Pinard, a Bank of America employee. That civil complaint by the Sacramento Municipal Utility District named Bank of America, JPMorgan, UBS AG and other banks as defendants, as well as CDR.

“It’s nice to have friends,” Naeh wrote in an e-mail to Pinard. “We’ll call you in a little bit.” Bank of America won the bid.

University of Tampa

On another deal for the University of Tampa in March 2002, Naeh and Pinard exchanged e-mails about their plans to rig a bid for an investment agreement, according to the utility’s lawsuit, which was moved from federal court in Sacramento, California, to New York.

“Call me on my cell below when you get a Tampa number,” Pinard wrote, according to the lawsuit. The Sacramento utility received the e-mails and descriptions of tape-recorded conversations and other evidence from Bank of America. Pinard didn’t immediately return a phone call seeking comment yesterday.

In February 2007, Bank of America disclosed that it was cooperating with Justice Department’s investigation in exchange for leniency. Shirley Norton, a Bank of America spokeswoman, declined to comment yesterday.

On August 16, 2002, Naeh caused the Missouri Health and Educational Facilities Authority to award an investment agreement to an unnamed firm, according to a court filing. The firm, identified only as ‘Provider A’, was awarded the bid after allegedly agreeing to pay CDR a kickback of $475,000, according to the October indictment.


The Missouri agency, which issues tax-exempt bonds for nonprofit hospitals and universities in the state, received an “artificially determined” interest payment on May 31, 2006, because of the kickback, the government said.

Bank of America won the bidding and then made a side deal under which it agreed to make periodic payments to CDR in exchange for an upfront payment from CDR, according to a letter from the U.S. Internal Revenue Service that was disclosed by the city in 2005.

Earnings Diverted

The IRS in 2005 told Atlanta officials that the payment swap may have been used to hide the diversion of investment earnings from the tax-exempt bond proceeds that should have been rebated to the government.

Federal prosecutors have alleged that the firms conspiring with CDR disguised their kickbacks by paying his company to broker swaps with other financial institutions.

The case is U.S. v. Rubin/Chambers, Dunhill Insurance Services Inc., 09-CR-01058, U.S. District Court, Southern District of New York (Manhattan).

Justice Department alleges bid rigging

"A California financial products firm, two of its current executives and a former executive were indicted on Thursday for bid rigging and fraud related to municipal bond contracts, the Justice Department said.The indictments against CDR Financial Products Inc, also known as Dunhill Insurance Services Inc, and the executives come after a three-year investigation that touched some of the biggest names in the nearly $3 trillion municipal bond industry.

A number of California municipal governments have sued CDR Financial alleging bid rigging, said Nanci Nishimura, an attorney at Cotchett, Pitre & McCarthy. The firm is representing Los Angeles and Stockton, Calif., as well as San Diego, San Mateo and Contra Costa counties in lawsuits against CDR Financial."

JPMorgan, Lehman, UBS Named as conspirators in muni bid-rigging

JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG were among more than a dozen Wall Street firms involved in a conspiracy to pay below-market interest rates to U.S. state and local governments on investments, according to documents filed in a U.S. Justice Department criminal antitrust case.

A government list of previously unidentified “co- conspirators” contains more than two dozen bankers at firms also including Bank of America Corp., Bear Stearns Cos., Societe Generale, two of General Electric Co.’s financial businesses and Salomon Smith Barney, the former unit of Citigroup Inc., according to documents filed in U.S. District Court in Manhattan on March 24. The papers were filed by attorneys for a former employee of CDR Financial Products Inc., an advisory firm indicted in October. The attorneys, as part of their legal filing, identified the roster as being provided by the government. The document is labeled “list of co-conspirators.”

None of the firms or individuals named on the list has been charged with wrongdoing. The court records mark the first time these companies have been identified as co-conspirators. They provide the broadest look yet at alleged collusion in the $2.8 trillion municipal securities market that the government says delivered profits to Wall Street at taxpayers’ expense.

‘Sufficient Evidence’

“If the government is saying they are co-conspirators, the government believes they have sufficient evidence that they can show they were part of the conspiracy,” said Richard Donovan, a partner at New York-based law firm Kelley Drye & Warren LLP and co-chair of its antitrust practice. Donovan isn’t involved in the case.

The government’s case centers on investments known as guaranteed investment contracts that cities, states and school districts buy with the money they receive through municipal bond sales. Some $400 billion of municipal bonds are issued each year, and localities use the contracts to earn a return on some of the money until they need it for construction or other projects.

Muni pension systems

California group pushes for pension reforms

A group of California taxpayer advocates is aiming to turn a bad run of news for public retirement plans into a pension reform movement in the nation’s biggest state.

They’re pushing a ballot measure that would scale back defined-benefit pension plans for new public workers at both the state and local level. They say their plan would save California governments $500 billion over 30 years.

“You’ve got public safety workers retiring with 24 years of service, retired in six-figure pensions for 35 to 40 years. We can’t sustain it,” said Marcia Fritz, president of the California Foundation for Fiscal Responsibility, a group that’s writing the pension reform ballot measure. “It’s not affordable.”

The group, which was founded by former California Assemblyman Keith Richman, has the support of taxpayer groups and has taken the first steps to put the measure before voters in November 2010. It has requested a title and summary from the California attorney general, which are needed before it could petition to put the measure on the ballot.

The group’s leaders met with Republican Gov. Arnold Schwarzenegger last month in hopes of garnering his endorsement. He hasn’t endorsed the effort yet, though he’s been pushing for pension reform for a while. He unsuccessfully tried to force a less far-reaching set of reforms through the Legislature with a budget package in June.

There’s no denying the run of bad news over the past year. Pension fund investment portfolios have withered even faster than the public budgets that would replenish them. Major local governments like Los Angeles, San Diego and San Francisco are facing sharp increases in their pension contributions to make up for investment losses, just as they are cutting public services to taxpayers.

Fitch Ratings cited Los Angeles’ rising pension obligations as it downgraded the state’s biggest city last month.

The California Public Employees’ Retirement System, the state and the nation’s biggest fund with 1.6 million members, lost $56 billion in the fiscal year that ended June 30. Its assets fell 23% to $181 billion from $237 billion. Fund values have rebounded to $197.6 billion at the end of September.

The fund’s chief actuary, Ron Seeling, made waves in August when he called current benefits “unsustainable.”

Even Democrats like Treasurer Bill Lockyer are warning that the state can’t afford to keep offering pensions and retiree health care benefits that increase endlessly.

“It’s impossible for this Legislature to reform the pension system, and if we don’t, we bankrupt the state,” Lockyer told Democratic state lawmakers on Oct. 22. “And I don’t think we can do it here because of who elected you. You’re just captive of the current environment.”

For the record, Lockyer doesn’t think the state is going to go bankrupt and constantly reminds the municipal bond market that the state’s general obligation bonds get paid first, before other obligations. Spokesman Joe DeAnda says the treasurer was trying to make it clear to lawmakers that current benefits, particularly for retiree health care, are not sustainable.

While Lockyer hasn’t endorsed the pension reform referendum, his spokesman said he’s looking at the measure.

Public employees’ groups say they’re willing to talk about cutting back pension abuses, such as pension spiking, whereby public workers compensation is boosted in the final year of work to make pensions larger. But they have pledged to stop the ballot measure at all costs.

“We’re very, very strongly opposed to it,” said David Low, chairman of Californians for Healthcare and Retirement Security, a labor coalition formed to oppose the measure. “It’s draconian. If you look at the numbers in the initiative, it doesn’t just reform pensions. It dramatically cuts pensions for every new public employee.”

Low said the measure would cut police and firefighter pensions by 35%, teachers by 45% and other employees by 50% or more. Fritz said the measure would offer a uniform, “modest, adequate, fair” defined-benefit pension for all state and local government workers in California.

She said the measure’s main benefit would be forcing pension decisions into the open. Fritz said current benefits are negotiated in closed-door collective bargaining sessions, with unions playing local governments off of each other to secure ever-higher pension benefits.

Her group would reduce benefit levels, increase retirement ages, limit pension benefit calculations to base pay alone, and require that any pension sweeteners be put to a public vote. Under the plan, a police officer or firefighter would get retirement benefits equal to 2.3% of pay for every year of service at age 58. That’s down from 3% at age 50.

Fritz admits her group faces an uphill battle, but she says voters are more likely to scale back benefits than elected officials who are beholden to public workers’ unions.

“In some ways, believe it or not, it’s just easier to go to the voters,” she said. “When we show them what people get and the little amount of work they have to do to get it, as far as the number of years, people tend to be very shocked.”

Low said that the $100,000 pensions publicized on conservative Web sites are rare, going to less than 1% of workers, primarily managers. He said the school bus drivers and cafeteria workers he represents are more likely to get pensions of $10,000 to $20,000 a year.

A Field Poll published in October showed some public support for pension reform. Some 60% of California voters supported capping the amount of pension benefits, while 56% favored replacing pensions with 401(k)-like defined contribution plans that have become common in the private sector.

Low said his group’s polling and focus groups show voters won’t go for the sort of deep pension cuts Fritz is proposing.

“It’s a nonstarter,” he said. “If this thing receives any support at all, we will oppose it with everything in our arsenal.”

GASB multiyear review of pension rules

Source: An Overhaul or a Tweak for Pensions New York Times, August 26, 2009

"After more than three years of deliberations, the board that sets the accounting rules for state and city governments is still far away from issuing a new standard for public pension funds.

What may seem like tedious labors over technical matters can have a large impact on public employees, taxpayers and investors. Many municipalities around the country are grappling with serious shortfalls in their pension funds caused by the recession and other woes.

Since the deliberations began, San Diego’s finances have been rocked by a pension scandal; Vallejo, Calif., has filed for bankruptcy after promising costly benefits; and New Jersey has warned that it lacks the cash to comply with its actuary’s instructions.

The panel, the Governmental Accounting Standards Board, heard impassioned testimony on Wednesday on the need to make public pension numbers more straightforward, more closely mirroring the pension accounting for corporations. But proponents of an overhaul were countered at every step by state officials and others who testified that broad changes were unnecessary and would disrupt budgets by introducing market volatility.

The board, an independent nonprofit organization that sets the accounting standards for governments, has said that the next step will be the publication, by next May, of a “due process document” to offer possible changes in the rules. That will engender a new round of public comment and revisions, and eventually a new pension accounting standard. The process is expected to take several more years.

“I have concerns that these efforts may, in fact, be too late,” one speaker, Diann Shipione, told the board. She said that the existing accounting rules were too loose, allowing “pension mischief” to go on for many years.

“As a result of the fuzziness and imprecision,” she said, “we now have many large systems that are essentially insolvent.”

Ms. Shipione, a former trustee of the San Diego city pension fund, eventually became a whistle-blower, insisting that the fund’s financial reporting was false, constituting securities fraud. After a long legal battle, the Securities and Exchange Commission agreed with her. She is now earning a master’s degree in public administration at the Kennedy School of Government at Harvard.

Ms. Shipione told the accounting board that she thought revisions were needed to make it easier to see when states and cities were falling behind on their pension contributions, which she hoped would prompt them to pump more money into the plans.

But some members of the board took issue with her goals. William W. Holder, one member of the accounting board, told Ms. Shipione that the board’s duty was to write rules that produced accurate and informative financial reports — not to promote desirable activities like funding pension plans more robustly.

“We try to avoid bias in setting accounting standards,” he said. “What we don’t try to do is develop some preconceived notion of what that behavior would be, and then write a standard that would encourage it.”

In the corporate world, the Financial Accounting Standards Board writes the rules for pension disclosures. It also seeks to avoid bias, and also works at a slow, deliberative pace.

But FASB has a great deal more power and independence than its governmental cousin. Its rules are enforced by the S.E.C., and it was given an independent funding source in the post-Enron accounting reforms. The corporate pension accounting rules came under harsh criticism at the beginning of this decade, and the FASB has already issued some revisions. Others are still in the works.

The governmental board, by contrast, must still raise its own money. And because no government agency enforces its policies, it must issue rules that states and municipalities will adopt voluntarily. Six of its seven members work on a part-time basis.

Others who spoke on Wednesday sought to assure the accounting board that its existing rules were sound. They acknowledged that some governments had had pension debacles in the last few years but said that was because they did not follow the rules.

Robert A. Wylie, executive director of the South Dakota Retirement System, said that pension woes were largely absent in his state and that his plan had a well-established funding policy.

Mr. Wylie said South Dakota had the ability to reduce promised benefits when times were tight, something forbidden by statute or constitution in many other states. Because of this flexibility, he said, South Dakota had always been able to keep its contributions in line with its benefits. For a state like South Dakota, he said, the existing pension rules were “very workable.”

“Major changes may add to what would be, in our mind, confusion,” he said.

Questions posed by the board members suggested they were leaning toward making narrow changes in the existing rules, like shortening amortization schedules or reducing the number of actuarial methods that plans may use. They did not seem eager to grapple with the question of which discount rate to use to measure public pension obligations — the biggest issue in the minds of critics of the current rules.

A recent study published by the National Bureau of Economic Research found that the discount rates now in use were masking a pension shortfall of $1.2 trillion at the state level.

The questions from the board members also suggested that they were interested in making public pension funds more comparable to each other. The current accounting rules allow so much flexibility that comparisons can be unfair.

Jeremy Gold, an actuary and economist who testified at Wednesday’s meeting, said he expected that when the new standard was finally issued, it would improve the comparability of pension plans.

“The center of gravity is still in favor of sharper pencils, rather than a whole new way of doing things,” said Mr. Gold, who called for radical changes. “This will make Texas, California and New Jersey all comparable while they go to hell in a handbasket.”

The accounting board will reconvene in Washington on Friday for additional testimony.

Municipal predation

"With the unraveling of the deal for the shadowy American Private Police Force to take over and populate an empty jail in Hardin, Montana, it's pretty clear that the small city got played by an ex-con and his (supposed) private security firm.

But an investigation by TPMmuckraker into how Hardin ended up with the 92,000 square foot facility in the first place suggests that, long before "low-level card shark" Michael Hilton ever came to town, Hardin officials had already been taken for a ride by a far more powerful set of players: a well-organized consortium of private companies headquartered around the country, which specializes in pitching speculative and risky prison projects to local governments desperate for jobs.

The projects have generated multi-million dollar profits for the companies involved, but often haven't created the anticipated payoff for the communities, and have left a string of failed or failing prisons in their wake.

"They look for an impoverished town that's desperate," says Frank Smith of the Private Corrections Institute, a Florida-based group that opposes prison privatization. "They come in looking very impressive, saying, 'We'll make money rain from the skies.' In fact, they don't care whether it works or not."


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