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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Opening Statement at the SEC Open Meeting — Municipal Securities Disclosure


Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

Washington, D.C.
May 26, 2010

Next, we will consider amendments to Exchange Act Rule 15c2-12 regarding municipal securities disclosure.

These amendments will help investors in municipal securities make more knowledgeable decisions, more effectively manage their investments, and avoid fraud. The amendments would accomplish this by improving the availability of timely and relevant ongoing information about municipal securities.

The amendments under consideration would be adopted substantially as proposed.

Municipal securities represent a unique and important segment of our capital markets. The municipal market touches the lives of every resident of the United States on virtually a daily basis. Municipal bonds help to finance the roads on which we drive, the schools that our children attend, and many of the hospitals from which we receive medical care.

The size of the municipal market reflects its significance to the economy. In 2009, there were approximately $2.8 trillion of municipal securities outstanding. Much of that amount is held directly or indirectly by retail investors. Individuals directly hold about 35 percent of the outstanding municipal securities, and another 34 percent is held by money market funds, mutual funds, and closed end funds on behalf of primarily retail investors.

But, the municipal market is not solely the province of buy-and-hold investors. Trading in this market has been substantial. In 2009, almost $3.8 trillion of long and short term municipal securities were traded in over 10 million transactions.

Despite the fact that the municipal securities market is now so immense, investors in this market don't have access to the same level, quality, or timeliness of information as those who invest in public companies. Access to enhanced information about municipal securities is more essential now than ever, given the significant fiscal challenges faced by many municipalities. Today's amendments are designed to provide this enhanced information on a timely basis, within the limits of our present authority.

Municipal securities generally are exempt from the registration requirements, many civil liability provisions, and the system of periodic reporting under the federal securities laws. However, the SEC does have authority over those entities that underwrite, or sell, municipal securities.

As a result, Rule 15c2-12, was designed to foster transparency in the municipal securities market. It does this by generally prohibiting underwriters from purchasing or selling municipal securities unless they have reasonably determined that the municipality or other designated entity has agreed to make certain key information available to investors on an ongoing basis.

Today's amendments will strengthen the rule's requirements with respect to the scope of securities covered, the nature of the events that issuers must have agreed to disclose, and the time period in which disclosure must be made.

First, the amendments would extend the reach of our municipal disclosure rule to securities with demand or put features, such as variable rate demand obligations — or VRDOs. These securities were relatively few and thus exempted from the rule at the time it was adopted in 1989. However, the market for VRDOs has grown substantially since that time. In 2009, for example, there were approximately $400 billion of VRDOs outstanding, and they accounted for approximately 34 percent of the aggregate trading volume for all municipal securities.

Second, the amendments expand the list of events relating to a municipal security that issuers must have agreed to disclose. This expanded set of events includes, for example, tender offers and the bankruptcy, insolvency, or receivership of persons obligated to make payments under the securities. This disclosure would be made on the MSRB's online EMMA system, so that it would be easily accessible by investors and other market participants.

Third, the amendments clarify that certain events, when they occur, are so significant that information about them should always be made available to investors, regardless of whether the issuer considers them to be "material." These include the failure to pay principal or interest on a bond; credit ratings changes; and substitutions of credit or liquidity providers.

Fourth, the amendments improve disclosure of tax risks, such as a determination by the IRS that interest on a bond may be subject to income taxation.

Lastly, the amendments provide for prompt disclosure of material events related to municipal securities — by establishing a specific filing deadline. The rule would mandate that issuers have agreed to make the disclosure in a timely manner, not in excess of 10 business days. This specific standard would replace the "in a timely manner" standard in effect today.

In addition, as part of the adopting release, the Commission is considering issuance of an interpretation concerning the duty of underwriters to the investing public under the antifraud provisions of the federal securities laws. The interpretation discusses the duty of underwriters to have a reasonable basis for recommending any municipal securities to investors and, in fulfilling that obligation, their responsibility to review the issuer's or obligated person's disclosure documents in a professional manner with respect to the accuracy and completeness of statements made in connection with the offering.

Although I believe that the Commission's regulatory authority over the municipal securities market should be expanded in order to better to protect investors and issuers alike, the amendments under consideration today represent an important improvement within our present statutory authority.

Before I turn this over to Robert Cook, Director of the Division of Trading and Markets, I would like to thank Robert, Jamie Brigagliano, David Shillman, Martha Haines, Nancy Burke-Sanow, Mary Simpkins, Molly Kim, Rahman Harrison, and Steve Varholik from the Division of Trading and Markets for your work on the recommendations.

Thank you as well to David Becker, Meridith Mitchell, David Fredrickson, and Janice Mitnick from the Office of the General Counsel; Henry Hu, Bruce Kraus, Josh White, Ayla Kayhan, Charles Dale, and Alex Lee from the Division of Risk, Strategy, and Financial Innovation; and Amy Starr and Nick Panos from the Division of Corporation Finance. Finally, I would like to thank the other Commissioners and all of our counsels for their work and comments on the proposed rule.

Now I'll turn to Robert Cook to hear more about the Division's recommendation.


Modified: 05/26/2010