In July 2012, the Securities and Exchange Commission (SEC) released its Report on the Municipal Securities Market, which lists various legislative and regulatory recommendations that would give the SEC greater authority over the municipal securities market.
Over the years, the Government Finance Officers Association (GFOA) has consistently and diligently worked with our members to encourage the development of comprehensive disclosure policies and practices to address perceived shortcomings relating to municipal disclosure. However, the GFOA has opposed, and continues to oppose, efforts by the SEC to expand its authority to regulate governmental accounting, financial statements and disclosure materials.
In its report, the SEC makes numerous proposals that would expand its current authority and supersede the authority, especially related to the development and oversight of governmental accounting standards that rests with the states. Furthermore, efforts to impose federally dictated content, timing and frequency of financial statements and disclosure materials, would breach the threshold of federalism and give the federal government unnecessary authority over state and local governments.
The GFOA reiterates its opposition to allowing the federal government to have authority, either by legislative or regulatory means, in the following areas:
1. The SEC should not set standards or interfere with the authority of an independent standard setting body to set standards related to a governments financial information.
The authority to set standards related to the content of financial statements rests with the states that delegated that authority to the independent standard setter, the Governmental Accounting Standards Board. Any attempt by the SEC to replace state authority, directly or indirectly, will be vigorously opposed. While the GFOA recommends that governments complete their comprehensive annual financial report (CAFR) within six months of the end of its fiscal year, no completion timeline should be forced on governments through federal regulations.
2. The SEC should neither directly or indirectly impose standards related to municipal securities issuers disclosure documents, including, but not limited to, those relating to the timing, frequency, or content of those materials.
The GFOA opposes efforts to any but especially unrealistic and unachievable timeframes on issuers to complete their annual financial information that must be submitted to EMMA pursuant to its continuing disclosure agreement.
For a variety of reasons governments need to establish their own procedures for the content, timing and frequency of their disclosure materials. The GFOA opposes any efforts to rush issuers into meeting artificial deadlines that will only serve to give investors and the public less reliable information, or to dictate the type of information that should be included in these documents.
3. The SEC should not mandate that all governments follow GAAP, as established by GASB.
Some governments, including many smaller ones, do not follow GAAP, but do follow accounting standards under Other Comprehensive Basis of Accounting (OCBOA). The SECs proposals ignore the fact that OCBOA is recognized by the American Institute of Certified Public Accountants (AICPA) as an accepted form of accounting eligible for clean audit opinions under Generally Accepted Auditing Standards (GAAS) and should be recognized as such. Forcing all governments to use GAAP accounting will simply be an unfunded mandate on governments who can afford it the least, and create significant disruption to their governments accounting practices. Furthermore, the AICPA not only recognizes the standards set by GASB, it is the official body that accepts them. The SEC does not need to make such a distinction that is already accepted in practice.
4. The SEC should not set standards related to the development, use and submission of interim financial information.
Financial information that goes beyond what a government states it will provide to the marketplace in its continuing disclosure agreement, is a determination that should be made by the issuing government, and not the federal government.
Governments produce extensive information throughout the year that is available in the public domain, including information related to its financial position and its budget status. GFOAs Best Practices encourage governments to post this already prepared information on their web site, and include a link to this information on the EMMA web site.
The SECs recommendations also acknowledge best practice initiatives from marketplace participants. The GFOA continues to encourage its members to implement GFOA Best Practices, industry initiatives to develop and promote disclosure best practices, and continued interaction between regulators and market participants to highlight the importance of thorough disclosure practices.
Recommendations to alleviate liability risks that exist when a government includes projections and forward looking information in its financial documents is part of the SECs recommendations and is supported by the GFOA. Many governments have had counsel advise them against the posting of their financial information in the public domain due to the perceived liability risks. Having the SEC state that no such liability exists would help issuers and investors access timely financial documents.
The GFOA also supports the SECs recommendation for corporate-like disclosure standards on tax-exempt bonds issued for the private sector. Entities that use bond proceeds to benefit a private sector business, should be treated by the SEC as if the company itself had issued the bonds, and therefore would have to comply with corporate disclosure regulations. Finally, the GFOA is especially pleased with the SECs recommendation to address currently opaque price transparency practices.
- Publication date: October 2012