A recent comment published by the National Association of Bond Lawyers notes that it was not too long ago that the municipal bond community (evidenced by numerous articles published in this newsletter!) was focused on the possible effects of tax law changes on state and local obligations. While that should still be a concern, it is not an immediate one. The short-term focus has shifted to the securities side. A recent speech given by SEC Commissioner Gallagher included strong language concerning disclosure of pension and OPEB (Other Post-Employment Benefit) liabilities. In addition, many members of the municipal bond community have been dealing with the questions and issues arising from the SEC's "Municipal Continuing Disclosure Cooperation Initiative", also known as MCDC. Most recently there was an address by Andrew Ceresney, Director of the SEC's Division of Enforcement, to the District of Columbia Bar.

Mr. Ceresney's address was not posted on the SEC website, which is unusual for the SEC. However, it was covered by the Bond Buyer ("SEC's Top Cop: Muni Market Is Fertile Ground For Enforcement Initiatives," June 11, 2014). While he spoke about topics other than the municipal market, he did, according to the Bond Buyer, praise MCDC and say that the Municipal Securities and Public Pensions Unit will be undertaking additional initiatives.

That focus on the municipal market by SEC Enforcement is consistent with the desires Commissioner Gallagher outlined in his speech. Commissioner Gallagher would like all municipalities to be required to follow the new GASB pension accounting standards. In addition to those standards, he believes that there should be a common baseline method of calculation for pension liabilities and contributions to allow for comparison among issuers. There should also be certain disclosures required when a plan's solvency is threatened. And these same requirements should be applied to OPEBs.

Regarding the way that pension liabilities and contributions have been valued before the new GASB standards, Commissioner Gallagher said: "This lack of transparency can amount to a fraud on municipal bond investors, and it does a disservice to state and local government workers and retirees by saving elected officials from making the hard choices either to fully fund the pension promises that were made to public employees or not to make the promises in the first place." Following the new GASB standards would, in Commissioner Gallagher's view, partially remedy the defects in the way that pension liabilities have been disclosed. But the additional disclosures noted above are, in Commissioner Gallagher's view, "necessary to make financial statements prepared using GASB standards not misleading."

The SEC's Report on the Municipal Securities Market (July 31, 2012) included a number of legislative recommendations. Of particular interest, given the MCDC Initiative and Commissioner Gallagher's speech, are the recommendations to grant the SEC the authority to require issuers to comply with continuing disclosure agreements, to use particular accounting methods and to require specific form and content of financial disclosures.

Interestingly, however, some of the language used by Commissioner Gallagher could indicate that another, non-legislative approach might be possible regarding pension accounting. Specifically, the disclosure practice prior to the new GASB rules "can amount to a fraud." And if the new GASB rules are used instead, then the additional disclosures outlined by Commissioner Gallagher "are necessary to make financial statements prepared using GASB standards not misleading."

Meanwhile, the calendar continues to move toward September 10, 2014, the deadline for MCDC. Though some have expressed a desire to extend that date, at some point MCDC will come to a close. Those underwriters who avail themselves of MCDC (probably a substantial fraction, if not all of the underwriters) and some issuers will then be subject to cease and desist orders. Issuers will be required to establish "appropriate" policies, procedures and training regarding continuing disclosure obligations. Underwriters will be required to engage an independent consultant "not unacceptable to the Commission staff" and to implement that consultant's recommendations regarding due diligence process and procedures, unless the underwriter can demonstrate to the Commission staff that the recommendations are unduly burdensome. Through the cease and desist orders, rather than legislation, the SEC will exercise some level of control over continuing disclosure compliance.