Speech by SEC Commissioner:
Improving Municipal Securities Disclosure: Our Work Is Not Yet Done
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
May 26, 2010
I join my colleagues in thanking the staff for its work over the past year on this important project. Using the limited authority we have over brokers and dealers in municipal securities, today we consider amendments that would enhance disclosure regarding municipal securities by:
replacing Rule 15c2-12's vague obligation of "timely" disclosure of certain events with a precise requirement of disclosure within 10 days;
increasing the number of significant events that must be disclosed pursuant to the rule; and
limiting the ability of issuers to withhold certain information by deeming it not to be "material."
Today, we also provide interpretive guidance clarifying the obligations of municipal securities brokers, dealers, and municipal securities dealers to have a reasonable basis for making recommendations to investors.
Taken together, these changes enhance the information that municipal issuers would make available to investors. This is a step forward in increasing transparency in the municipal securities market, and I will vote to adopt these amendments. However, as I said at the proposing stage last July, these changes represent only incremental progress. A fundamental overhaul of municipal securities disclosure requirements remains sorely needed.
The municipal securities market is enormous — roughly 51,000 issuers and approximately $2.8 trillion in outstanding securities. Trading activity is substantial — nearly $4 trillion last year — and about two-thirds of municipal securities are held by individual investors, either directly or indirectly through municipal mutual funds and other means. Moreover, just as with corporate debt, defaults occur in municipal securities. As today's rulemaking release notes, 140 issuers defaulted on a total of $7.6 billion in municipal securities in 2008. And the difficulties that many municipalities currently face in balancing their budgets means that investors, more than ever, are acutely in need of accurate and timely information with which to evaluate their municipal holdings.1
Despite the size and significance of this market, however, there remains a substantial gap in the Commission's authority to effectively and comprehensively regulate municipal securities. Due to the statutory constraints of the Tower Amendment,2 we cannot directly regulate issuer disclosures, but must instead work indirectly through the requirements imposed by Rule 15c2-12 on brokers, dealers, and municipal securities dealers. Additionally, absent fraudulent conduct, the Commission lacks enforcement authority when municipal issuers fail to meet their contractual obligations to provide disclosure.
While the discrete improvements we make today to Rule 15c2-12 are important, I remain concerned that the timeliness and quality of financial reporting by municipal issuers will continue to lag far behind that of corporate issuers. For example, although the MSRB rules that will also be approved today will aid investors in identifying municipal issuers that make timely filing of financial information prepared in accordance with GASB-GAAP, neither timely filing nor the use of GASB-GAAP will be required.
I also remain concerned that Rule 15c2-12 does not address specific disclosure items that are highly relevant to the issuer's financial health — such as an issuer's exposure to swaps and other derivative contracts. Today's release notes that such additional disclosures were among those requested by commenters — with good reason. For example, as we learned through our investigation of bond offering and swap transactions involving J.P. Morgan Securities and Jefferson County, Alabama, swap termination fees of $647 million might have bankrupted that municipality.3 I think that all municipalities should make information such as this available to investors.
Many of the comment letters we have received in this rulemaking reveal a strong desire for increased disclosure by municipal issuers. And while today's amendments reflect measurable progress, our work here is clearly not yet done. Many municipal issuers provide extensive, high-quality disclosures, but too many others lag behind. The Commission should consider the additional disclosure items suggested by investors through the comment process and act quickly to include appropriate items within Rule 15c2-12, even as we pursue broader changes in the regulatory scheme. As I have said many times before, Congress should repeal the Tower Amendment and provide the Commission with the authority to effectively regulate the municipal securities markets. These markets are crucial for America's cities, towns, and investors, and they should be regulated to provide for fairness, transparency, and efficiency.
Finally, I once again want to thank the staff for its work to protect investors in municipal securities.