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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
A Step Forward in Protecting Investors in Municipal Securities


Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

Open Meeting
Washington, D.C.
July 15, 2009

Municipal securities disclosure is an area where improvements are truly needed. I support today's proposal to amend Rule 15c2-12 because it is a step — if only an incremental one — toward increasing transparency in the municipal securities market.

Removing the exemption for variable rate demand securities from the application of 15c2-12 will bring a significant and growing portion of the municipal securities market into the rule's continuing disclosure provisions. In addition to expanding the types of municipal securities subject to 15c2-12, today we are also proposing amendments to specify the maximum time period for the timely filing of event notices with the Municipal Securities Rulemaking Board, and to expand the events required to be disclosed pursuant to the continuing disclosure obligations.

Further, the MSRB rules discussed earlier this morning that will create a system to identify issuers that voluntarily file annual audited financial statements in accordance with GASB-GAAP should increase the transparency of financial disclosure available to investors.

While I believe that the amendments we are proposing today, as well as the forthcoming MSRB rules, will benefit investors, we must recognize that they only represent incremental progress and do not achieve the fundamental overhaul of municipal securities disclosure requirements that is sorely needed. Studies indicate that the continuing disclosure that is actually available to investors on a timely basis has been limited because of inconsistent compliance with Rule 15c2-12.1 With the advent of the MSRB's Electronic Municipal Market Access system, better known as "EMMA," the Rule 15c2-12 amendments we propose today, and the forthcoming MSRB rules, we can expect a significant improvement in the continuing disclosure regarding municipal securities that will be available to investors. However, the Commission could better serve investors if it had the authority to set-and to enforce-municipal securities disclosure standards, rather than having to indirectly regulate in this area through broker-dealer rules that, in turn, rely on contractual enforcement of issuers' continuing disclosure obligations.

For example, I would like to highlight two particular concerns regarding municipal securities disclosure that are not addressed by today's proposed amendments to Rule 15c2-12. The first concern involves disclosure about swaps and other derivative transactions entered into in connection with municipal bond issuances. With the recent difficulties in the auction rate securities market, it became apparent that disclosure regarding swaps and other derivatives entered into by municipal issuers was lacking, which required significant effort by investors and analysts to uncover information necessary to properly understand the investment risks.2 The terms of swaps and derivatives entered into by municipal issuers, and the identification of counterparties on these instruments, as well as the existence of guaranteed investment contracts and commercial banks providing letters of credit or liquidity agreements, can be material to investors. Because the terms and triggers present in these instruments may materially impact issuer credit quality, it is important that disclosure in this area be improved.

The second concern relates to the timeliness and quality of financial reporting. While I believe that municipal securities disclosure could be closer in content to corporate disclosure standards in general, the contrast with financial reporting standards in terms of timeliness and transparency is striking. Investors in municipal securities do not have the benefit of periodic reporting, and furthermore, although many municipal issuers provide high-quality and timely financial reports, others provide annual financial statements late, in some cases even with years of delay. Moreover, there is no mandated consistency of accounting standards used by municipal issuers; some issuers voluntarily choose to report under GASB-GAAP, while others do not, making comparisons difficult for investors. In addition, when you consider that many municipal securities are not general obligation bonds, but rather securities issued by conduit borrowers, such as hospitals or community colleges, the discrepancy between corporate and municipal issuer financial reporting requirements becomes difficult to justify. While the forthcoming MSRB rules should assist investors by making it easier to identify municipal issuers that use GASB-GAAP that timely file their financial information, the rules will neither mandate the use of a set of appropriate, high-quality accounting standards, nor will they set an enforceable deadline for the filing of timely financial statements.

To clarify the Commission's legal authority to fully address these concerns, I join the Chairman in asking Congress to repeal the Tower Amendment and otherwise to provide the Commission with the authority to effectively regulate the municipal securities market. In the meantime, I encourage municipal issuers and organizations, such as the Government Finance Officers Association and National Federation of Municipal Analysts, to continue their good efforts to voluntarily improve disclosure in these areas. I also commend the many issuers that already provide extensive and high-quality disclosures.

In conclusion, I am pleased to support today's proposal. Together with the MSRB rules discussed today, it represents a needed step forward in improving municipal securities disclosure.



Modified: 07/21/2009