Speech by SEC Commissioner:
Keynote Address at the National Federation of Municipal Analysts (NFMA) Twenty-Eighth Annual Conference
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
May 4, 2011
Good morning and thank you, Jennifer, for that kind introduction. I am delighted to be here today to speak with you about the SEC’s efforts with respect to the municipal securities market. My interest in this subject dates back to my prior tenure at the Commission, when I worked on municipal securities disclosure issues — in particular the Commission’s 1994 antifraud interpretive release.1 I left the SEC staff shortly after the interpretive release was issued, although I can assure you that my departure was unrelated to my work on that release. Fourteen years went by until I rejoined the SEC in 2008 as a Commissioner. Not only was I delighted to return to the agency where I grew up professionally, I was pleased to once again be in a position to devote my energy to improving the state of the municipal securities market for the benefit of investors.
This morning, I’d like to make a few brief remarks, and then I would really like to hear from you, answer your questions, and understand better what is on your minds. Before I continue, I should remind you that my remarks represent my own views, and not necessarily those of the Commission, my fellow Commissioners, or members of the staff.2
There were many, many changes in the securities markets in the decade and a half between my two stints at the SEC. Nonetheless, it is often said that the more things change, the more they stay the same. I learned recently that this phrase comes from a French proverb of debated vintage and appeared in George Bernard Shaw's 1903 drama “Man and Superman” as part of an appended work by his protagonist entitled “The Revolutionist's Handbook and Pocket Companion.” But to me, it also applies to the municipal securities market. Significantly, despite its size and obvious importance, today investors in the municipal securities market still lack many of the protections they have in other sectors of the U.S. capital markets. That is not a satisfactory state of affairs. As I have stated repeatedly, investors in municipal securities should not be treated as second-class citizens. They should, for example, have the same rights as investors in other types of securities to receive accurate and timely financial and other material information. These precepts are central to informed investment decision-making and investor protection.
Chairman Schapiro shares my desire to strengthen protections afforded to investors in municipal securities, and I was honored when she asked me to lead a series of field hearings across the country to elicit the analyses and opinions of a broad array of municipal market participants. Our plan was to have the Commission staff prepare a report concerning what we learned during the hearings, including any recommendations for legislative changes, new or changed rules, and suggested high quality industry practices.
We embarked on our “learning tour” last fall — with field hearings in San Francisco and Washington, DC — before budgetary woes befell us. Although we had planned to hold four additional field hearings in regions across the country, the Commission’s budgetary constraints have forced us to put those plans for additional field hearings on hold.
In fact, until just a few weeks ago (when the 2011 budget was enacted), it looked as if budgetary constraints were going to prevent me from travelling down here for this conference. Although it would have been less than ideal, my staff was in close contact with Greg and Lisa to set up a video-conference, had I not been able to travel. That said, I am especially happy to be here today in person. I live in fear of jumbo video screens, which seem to magnify everyone’s flaws and none of their attributes. And, more seriously, I do prefer to have conversations in person.
Despite the current hold on further hearings, we are moving forward with our initiative. The review of the municipal securities market will still culminate in a staff report, although, in the absence of additional public hearings, it is more difficult and time-consuming for our staff to gather the information it needs. We are now carrying out this initiative by holding conference calls and meetings with market participants on an individual basis to gather information and opinions about a wide range of topics, spanning from timeliness of financial information to disclosure of pension obligations to issues surrounding credit ratings to investor protection and education to market structure issues… and the list goes on. The scope of our review is very broad. Essentially, we’re aiming to “get smarter” on the current state of the municipal securities market so that we can better evaluate that state and any improvements needed from our investor protection standpoint.
As long-time Commission Chairman, Arthur Levitt, and former SEC Commissioner, Rick Roberts, have both emphasized, more information is “the principal way to improve the integrity of the issuance and trading of municipal securities” — more information about issuers to enhance the ability of investors to make informed investment decisions; more information to enable investors to obtain fair prices; and more information to enable regulators to do their jobs better.3 Among these important goals, I believe that our shorter-term priority should be to improve the quality and timeliness of information available to those who buy and sell municipal securities.
To that end, I believe that the amendments to Rule 15c2-12 under the Securities Exchange Act of 1934 that we adopted a year ago help move us in the right direction. Rule 15c2-12, as it has been amended over the years, generally prohibits underwriters from purchasing or selling municipal securities unless they have made a reasonable determination that the municipality or other designated entity has agreed to make certain key information available to investors on an ongoing basis. The recent amendments 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 event disclosure must be made.
I was also pleased that, in connection with our adoption of the 15c2-12 amendments last May, the Commission simultaneously approved a proposal by the MSRB to enhance EMMA to, among other things: (1) permit issuers and their designated agents to make voluntary submissions of official statements, preliminary official statements and related pre-sale documents, and advance refunding documents and (2) facilitate the recognition of municipal issuers that have voluntarily agreed to file annual financial information within 120 calendar days after the end of the fiscal year and prepare audited financial statements in accordance with generally accepted accounting principles.
I don’t think it’s an exaggeration at all to say that the coming of EMMA and its enhancements have been the single greatest advance for investors in the municipal securities market for decades. With respect to both primary offering and secondary market information, EMMA has made a real difference. I commend Lynnette Hotchkiss and her MSRB staff, as well as the MSRB Board now under the leadership of Michael Bartolotta, for their proactive approach to the availability of information through EMMA. Of course, there is always more that can be done — much more — for example, a stream of information concerning rating changes. I am pleased to report that Fitch has agreed to participate in the MSRB’s initiative to provide real-time municipal securities ratings information to the public for free through EMMA. I understand this is expected to launch in the Fall, and my hope is that other rating agencies will follow suit.
I know that the MSRB is committed to continuing to enhance EMMA and I would like to see the SEC continue our close work with the MSRB with respect to electronic collection and availability of information in the secondary market.
And, speaking of there always being room for improvement… as you well know, the SEC’s authority with respect to the municipal securities market is quite limited. We do not have the ability to set even general disclosure requirements or require that reports be issued on a periodic basis in the municipal securities arena. In seeking information improvements, we have been forced to rely on our authority over the professionals in the marketplace and our antifraud jurisdiction. As I mentioned, the Commission issued interpretive guidance in 1994 regarding the application of the antifraud provisions of the federal securities laws to municipal securities and municipal securities market participants. Commission staff is currently preparing an update to that release. With respect to the Commission’s exercise of its antifraud jurisdiction, our specialized municipal securities enforcement team, under the leadership of Elaine Greenberg and Mark Zehner, has greatly strengthened our efforts by honing our depth of knowledge and expertise.
But, in order for the Commission to enhance investor protections in the municipal securities market further, I believe that additional authority from Congress would be quite helpful. Of course, it’s far too early to tell if this will go forward, but I am extremely pleased that a number of key Members of Congress have indicated an interest in municipal securities market reform and, in particular, more timely and consistent financial disclosure by municipal securities issuers. In fact, tomorrow there is a hearing on Capitol Hill concerning the measurement and transparency of funding levels of State and local pension plans, including whether municipal issuers should lose their ability to issue debt that is tax-preferred under Federal income tax law in the absence of making certain pension disclosures.
In order to achieve significant improvements — especially in the near-term, I believe we need to employ a layered approach — meaning at the legislative, regulatory, and industry levels — and, we all need to work together. In addition to any efforts by Congress or the Commission to improve the state of the municipal securities market — industry initiatives can be tremendously influential.
For example, I applaud the efforts of the NFMA and other groups, who have worked over the years to move things in the right direction, by promulgating “best practices” guidelines and engaging in other projects. In fact, just this week, the National Association of Bond Lawyers (NABL) has released a discussion draft regarding considerations in preparing defined benefit pension plan disclosure in official statements. I think this is an excellent topic for collaborative industry efforts and see a huge potential for disclosure improvements. This, of course, involves a highly technical subject, in which specialized experts like actuaries and accountants, as well as issuers, underwriters, lawyers, advisers and analysts, must all play important roles. I believe that you have the opportunity to work together productively on this topic in the interest of improved pension disclosure for the protection of investors. But, those in the industry may also wish to do so for their own protection. Indeed, as our enforcement cases demonstrate, under some circumstances, getting pension disclosure wrong can lead to antifraud charges. Of course, our staff is continuing to evaluate this topic, and you may well see this addressed in the updated antifraud interpretive guidance that I mentioned earlier.
In addition to encouraging collaboration among industry participants, I’d also like to encourage collaboration with the Commission. We greatly value input from the industry as we carry out our investor protection mission in the municipal securities market. We know that you share our concern over the relative difficulty in obtaining complete and timely financial information from many municipal issuers. How do you think issuers can be incentivized to produce financial disclosure more promptly? Besides audited financials — which inherently take some time to produce — what other information would be useful to you and to investors? How can we make better use of existing materials? For example, we know that, between CAFRs, municipalities are preparing budgets and cash flow statements — and we understand that some of them make those documents available on their websites. How can we get more municipalities to do the same? And how can they make the information more easily accessible to investors? How can EMMA be further leveraged to meet the needs of investors?
Some, including myself, have suggested looking to the corporate disclosure scheme as a framework for municipal disclosure. I’d like to clarify that again this morning — corporate disclosure is germane, but only to a limited extent. While I believe that we can learn much from the corporate world, I also believe that it is essential that we recognize the differences in the municipal and corporate finance worlds and that we work together to evaluate any future changes in the municipal finance disclosure framework.
I urge you to think creatively and share your wisdom with us. If you have thoughts to share today — terrific! And, if you need more time to develop your ideas, please keep us in mind and reach out when you’re ready. We have a dedicated page on the SEC’s website with information about how to reach us (http://www.sec.gov/spotlight/municipalsecurities.shtml) — you can submit comments online, by email (email@example.com) or by phone (202-551-5727) — or you can simply call us and ask for a meeting. In fact, we’re looking forward to meeting with Greg and others from the NFMA next week! With that, I’ll conclude my opening remarks, and I’ll be more than happy to answer your questions.
1 Statement of the Commission Regarding Disclosure Obligations of Municipal Securities Issuers and Others, Release Nos. 33-7049; 34-33741 (effective March 9, 1994), Federal Register Volume 59, Number 52 (Thursday, March 17, 1994).
2 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publications or statements by any of its employee. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, other Commissioners, or the staff.
3 Remarks of Richard Y. Roberts, Commissioner, U.S. Securities and Exchange Commission, “Comments on Municipal Market Reforms and Rule 2a-7, Municipal Analysts Group of New York, December 3, 1993, available at http://www.sec.gov/news/speech/1993/120393roberts.pdf. See also, Arthur Levitt, Jr., “The state of the municipal securities market,” Government Finance Review, December 1993.