1999 Municipal Market Roundtable
United States Securities and Exchange Commission
Chairman Levitt – Thank you very much and good morning. I am delighted to see all of you here, many of you professionals who work in this market as a daily undertaking and a number of municipal officials. I really identify with those officials. I welcome your presence here.
As you probably know, my father spent much of his life as comptroller of the state of New York. And part of my career has been spent working with many of you. And I'm glad you're here in our home today and I hope in a spirit of consensus and cooperation we can further the goal of working together. There are very few absolutes in life. I think all of us care passionately about preserving America's markets and I think all of us share our concern for protecting the interests of America's investors, not necessarily by regulation or legislation but more by full disclosure.
We have a number of moderators today that have given their time to make presentations. I am really very grateful for that. And the superb staff that has put this conference together is one that I owe a great debt of gratitude to.
Over the past year, a lot of time has been dedicated to issues involving regulatory modernization, market structure, which has certainly been in the forefront in recent weeks, and financial reporting, which has been in the forefront for a number of years. One of my first priorities when I came to the Commission was in the municipal market, and it remains an area of immense importance. I'm glad we can all gather today to assess where we've been – and more important – to focus on where we're going.
I suppose that all of us to greater or lesser degrees develop attitudes as a function of our experience. And I, too, having worked in the municipal market have developed feelings and attitudes that relate to that experience. I guess at heart I'm still a broker. I still resonate to the interests of those wonderful retail customers that I dealt with for many years. As a matter of fact, I miss that part of my life from time to time. But their attitudes about our debt markets, what motivated them to a very considerable extent impact my views and my goals and my objectives.
And, certainly, when I first came here the need for reform in the municipal bond market was obvious. The $1.3 trillion market which was once the domain almost exclusively of institutional investors has either directly or indirectly been taken over by individual investors. And I'm not sure that practices have evolved accordingly. Official statements in primary offerings had been all but impossible to obtain and, if available, the disclosure that we were seeing was less than desirable.
The voluntary efforts to improve that condition I think were useful efforts but they produced very few tangible results. After issuing bonds, few of the 52,000 issuers of municipal debt provided any kind of ongoing disclosure, and no central place existed to which an investor might go to find out the current condition of a bond that was issued some years ago.
That same investor had no ready means to find the current price of bonds he held, or even to determine whether the price he just paid was fair. Transparency simply didn't exist. I don't have to tell all of you that the core of our securities laws, the antifraud provisions, governed transactions in municipal securities, but municipal bond matters rose to the enforcement agenda infrequently. Regulators simply didn't have audit trails and they worked in a certainly uncoordinated fashion to police the market.
What's more, corruption, conflicts of interest that could have stirred the envy of Boss Tweed had tarnished the reputation of the municipal market, overshadowing the many honest and diligent people who work there as well.
I'm chided from time to time by talking about such issues. Believe me, having worked in this market I know full well that over 95 percent of the people who work in the market are good, honest, decent, sound people. But that doesn't mean we can turn away from the charlatans, the crooks, the one who prey on investors, the ones who dissemble. We are going to be more and more active in that arena. But that is not to say that all of you shouldn't share that same interest.
When I speak of this industry I speak of it as a good, honest, fair, progressive industry. When we speak about the bad people in it we have no sympathy.
There was a magazine several years ago that labeled the market as America's notoriously corrupt municipal bond market. I think that kind of publicity is very, very destructive and left us with very little choice but to act. I put municipal bond reform at the top of the Commission's agenda. And I say, fortunately, many of you did as well. We formed a partnership between the Commission and those in the industry and we crafted a framework for secondary market disclosure through the amendments to rule 15c2-12.
Like any group of regulator and regulated, we didn't see eye to eye on everything. But I think we developed a healthy respect for one another's views. Our efforts were certainly the result of any catastrophe which took place in the market but they were a product of a consensus view. We hoped that our reforms would be well in place before the next crisis. Little did we know how soon it would come.
Within the month of our adoption of continuing market disclosure, and some months away from the effective date, Orange County filed for bankruptcy in what remains the largest municipal bankruptcy in the history of the nature. But as often happens, out of the ashes of this tragedy came many important and timeless lessons, such as the need for both prudent management of public funds and adequate disclosure of purposes of governmental borrowings and the risks associated with such financings.
Many of our settled proceedings during this time break out the reports of corruption that we found so disturbing and so prevalent six years ago. We initiated and settled proceedings involving hidden payment arrangements, conflicts of interest and kickbacks from New England through the mid-Atlantic, the South, and the West by regional and national underwriting firms. Other proceedings involved yield-burning. Several proceedings remain pending before the courts or the Commission, or are under active investigation.
The message to investors, the message to our markets I think is clear: our Enforcement Division is now a permanent part of the municipal landscape.
Only a few weeks after I was sworn into office, I said to the Congress that "to some observers, the most significant flaw in the municipal securities market is the lack of trading information available to investors and market professionals." Today, in addition to centrally available continuing disclosure for most municipal issues, next-day price and volume information is now available for municipal securities trading four or more times during a trading day. The MSRB has proposed to expand the data available and provide it free of charge over the Internet to subscribers. The Board expects this data to cover on average 9,000 individual transactions in approximately 1,000 frequently traded issues each day.
This MSRB program also provides the Commission and the NASDR with audit trails, reports of essentially all inter-dealer and all customer transactions. Regulators now have available the footprints of fraud in market transactions. Additionally, this data offers information on municipal market trading activity that was never before gathered in any one single place.
Six years ago, I also asked market participants to act together to ban the practice of pay-to-play, the selection of underwriters and other professionals based largely if not exclusively on political contributions. The dealers quickly responded through adoption of the voluntary ban and the MSRB followed with adoption of Rule G-37. This spring, the dealers were joined by independent financial advisers, who embraced a voluntary ban.
However, one significant party at the transaction table has failed to adopt even a voluntary ban - the lawyers. It is unfortunate that the one group of professionals that has a code of ethics is unable to come to terms with a practice that unfairly casts its shadow over those awarded legal work by elected officials.
This summer the American Bar Association failed to seize the opportunity to incorporate prohibitions on pay-to-play into its model rules of professional conduct. This is nothing less than a shame. Their clients are far ahead of them in occupying the ethical high ground.
For us, of course, ending pay-to-play is and always has been a matter of market reform, not campaign finance reform. Recent events, such as the conviction of the treasurer of the nation's second largest city for extorting campaign contributions from a manager of public funds, starkly illustrate the problem.
It's been said that trust is won with difficulty and easily lost. Municipal bonds and the municipal bond market have enjoyed a solid reputation because of the valiant efforts of people like you here today. We must all work to maintain and enhance public faith in this critically important market.
This morning, at what I hope and expect will become an annual event, we take another step to help ensure the municipal markets are even more transparent and more trustworthy. As you know, we have designed the Roundtable around a series of panel discussions. I'd like to mention a few of the panel topics, and raise some additional, more specific questions that I would hope would be addressed in these discussions.
The first panel will address the issue of primary offering disclosure. Among the questions that should be asked are who should be responsible for disclosure - issuer, underwriter, lawyer, or perhaps financial adviser? Are underwriters given sufficient time to review those disclosure documents? Whose documents is the Official Statement? Has there been a change in disclosure since publication of the Commission's 1994 interpretive release? Are conflicts of interest being adequately addressed in disclosure?
After that, the second panel will concentrate on secondary market disclosure. First and foremost, has continuing disclosure consistently taken place? If not, why and where exactly do the problems exist? Are financial statements and other information reviewed from material changes prior to filing? Has a failure to provide financial information by a deadline been filed with the appropriate bodies?
This afternoon, we will discuss electronic disclosure, an issue that is on the minds of all market participants. I would be interested in knowing if potential customers are, in fact, requesting electronic delivery. What qualifies as an investor's consent for receiving electronic disclosure instead of disclosure through the regular mail? What concerns do issuers have about electronic disclosure?
I know that most of you are familiar with the city of Pittsburgh's move to sell bonds directly over the Internet. I kind of think that this is just the beginning of a broader move to the Internet by issuers. If so, what impact is this going to have on the marketplace?
In recent speeches in conferences I have signaled the Exchange's willingness to consider technology as an ally, not as an enemy, to seek new ways of reducing costs and providing additional disclosure and information. This is clearly right on target in terms of what we expect to do with electronics.
And, finally, today's roundtable will focus on the scope of fiduciary duty owed by professionals in a municipal bond offering. What precisely are the functions and responsibilities of a financial adviser? And do underwriters have a similar fiduciary duty? What type of conflicts of interest arise? And, under what circumstances do bond counsel have disclosure duties?
Now, some of you are probably thinking of the line, "Question everything. Learn something. Answer nothing." Well, I hope that together, we may be able to develop some of the right answers. During these roundtables I pledge to you that we will listen and we will respond when appropriate. We will continue to offer guidance beyond today's dialogue, either formally or informally, through interpretive guidance.
In that spirit, I hope all of you will ask some tough questions and respond with frank and honest answers. If you think that a current practice doesn't serve investors' interests, speak up. If you think that a Commission rule or position is ineffectual, please sell – tell us.
If after six years of nearly monthly testimony before different committees of the Congress, who seek every opportunity to tell me what we may be doing wrong, if I haven't been insulated against criticism I guess I never will be. It's useful to have you tell us not what you think we want to hear but to tell us how we can do a better job, how we can be more constructive. It's in that spirit that this group has been convened. It's not going to answer every question. It won't solve every problem. But it should be the beginning of an ongoing dialogue, reduces some of the tensions, moves us forward in a constructive way.
Each of us has our own jobs to do and different responsibilities. But a market that isn't open, isn't fair, isn't efficient, isn't competitive is a market that's going to lose itself to over venues. You recognize that and we do as well.
In that spirit, with those goals, with that objective let's see whether we can come out of this day with a better feeling about where each of us are and where collectively we can go together
Thank you very much.