‘Take it seriously,’ SEC’s Sanchez warns municipal bond market

The Securities and Exchange Commission’s chief of the Office of Municipal Securities Dave Sanchez urged issuers and muni professionals to stay vigilant in a smorgasbord of areas that regulators are watching, from late audits to shady conduit deals to unregistered advisors in the public-private partnership space.

“If you guys aren’t able to have this discipline on your own, this is where outside forces will start to want to impose discipline,” Sanchez said Saturday, speaking to the Government Finance Officers Association’s Debt Committee during the GFOA’s annual meeting. He was speaking specifically about late financial audits, but the light warning could have applied to any number of areas that that Sanchez highlighted during his talk with the committee.

On the market side, Sanchez said the SEC is watching two particular sectors where defaults are relatively high: joint power authorities and charter schools.

Dave Sanchez, director of the Office of Municipal Securities at the U.S. Securities and Exchange Commission, said areas like climate-risk disclosure and timely audit filings are easy areas for regulators to check.

Donna Aberico

“A lot of times when enforcement actions come down the road, people say they had no idea — I want to be clear and I hope people take it seriously because there are a lot of issues particularly in California with these organizations,” he said, referring to JPAs, which act as conduit issuers of debt.

“They wouldn’t exist but for you,” he said, referring to the cities and towns that form the membership of the authorities. Arizona has tightened some of its standards for JPAs, but otherwise “I haven’t seen much movement,” Sanchez said.

Charter schools are seeing a “rapid” rise in the number of defaults, Sanchez noted. A recent Municipal Market Analytics report showed a record 67 ongoing charter school impairments in the MMA database.

“Could these deals have been stopped if various gatekeepers, including you, were keeping a closer eye?” Sanchez asked.

The unregistered municipal advisor rule is now a decade old, and may have faded among some who operate on the fringes, Sanchez said, but the SEC is keeping its eye on the issue. Charter schools mark one vulnerable sector, where some consultants want to act in several roles for a school, he said.

Another area where the lines may be getting blurred: public-private partnerships. The regulation falls on the advisors, not the issuers, Sanchez said. But violations ultimately hurt the issuer.

“As people are looking at P3s, they are [sometimes] saying this was more expensive debt than the issuer needed and a lot of the reason is because people designing the capital stack are not aware of, or mistaken about, the cost of borrowing,” Sanchez said. “These alternative forms of financing are being used when you could use more traditional forms of financings so it’s more about saving yourself money,” he said, citing recent comments published in The Bond Buyer from a Florida official expressing skepticism of the benefits of P3s for governments.

On the always-hot topic of accurate climate disclosure, Sanchez cited recent independent reports that reveal differences among disclosure practices even among issuers located in the same area.

The differences appear to be due to the muni professionals working with the issuer, like disclosure counsel, underwriter or advisor, he said.

“When people drill down, they’re still seeing some pretty big differences, which suggests someone is not providing as fulsome disclosure as they should,” he said. “A lot of times the differences are in who are the professionals assisting on the deal, that frankly seems to be the biggest difference,” he said. “Patterns tend to be based on professionals.”

He warned that climate disclosure is an easy area for regulators to keep tabs on, for example after an extreme weather event.

Another area that offers an “easy metric” for regulators is the timeliness of financial reports, Sanchez said. The average time municipal issuers take to submit their audited financials to the Municipal Securities Rulemaking Board has been steadily rising since 2018 and for 2023 reached its highest-ever recorded by the board at 209 days.

“The change wasn’t very dramatic, but people will continue to focus on this,” he said. “It’s an easy metric to measure, and when it doesn’t look good, that’s when you start to see tightening of regulation in the market.”

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