Speech by SEC Commissioner:
Statement at SEC Field Hearing on the State of the Municipal Securities Market
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
July 29, 2011
Good morning, and thank you Mayor McBrayer, for that kind introduction, and for welcoming us to Homewood. It is a pleasure to be here with so many knowledgeable municipal market participants who are joining us today to give us the benefit of their expertise on issues of central importance to the municipal securities market. For those of you joining by webcast, thank you for tuning in.
I am sure that all of you were looking forward to hearing from SEC Chairman Mary Schapiro this morning. Unfortunately, due to a family health emergency, Chairman Schapiro is not able to participate in today’s hearing. She sends her sincere regrets.
The distinguished Chairman of the House Financial Services Committee, the Honorable Spencer Bachus, had also hoped to be with us today. However, as we all know, Capitol Hill is a particularly busy place at the moment. Due to the urgency of the national debt ceiling negotiations, Chairman Bachus is also unable to attend today’s hearing in person. We are very pleased, however, that Larry Lavender, the Majority Staff Director of the House Financial Services Committee, will be speaking to you on behalf of Chairman Bachus after I conclude my opening remarks.
OVERVIEW OF FIELD HEARINGS
Given the SEC’s limited authority over municipal securities, our options for addressing problems in this market have historically been quite limited. However, as the municipal market grows larger and more complex, it is increasingly important that we redouble our efforts and give this critical marketplace much needed concentrated and greater attention -- and we are doing just that.
As many of you know, the SEC was created to be, in the words of one early Commission Chairman, “the investor’s advocate.” That means we work to help ensure that investors are protected and have the information they need to make informed decisions.
As their advocates, we are concerned that investors in the municipal securities market may not have the protections and access to information that they need. We are also concerned that they may not be able to make fully informed investment decisions regarding the prices of securities they wish to buy or sell in many cases or the spreads demanded by the brokers who make the market. These conditions can lead to market distortions and prevent investors from accurately calculating risk when making investments, potentially leaving them more exposed than they understand or wish to be.
That is why we have undertaken a concerted effort to study the municipal securities market. Last year, Chairman Schapiro asked me to lead an initiative to review the state of the municipal market by gathering input from market participants and identifying ways in which the Commission can improve the state of the market for investors. Today’s hearing is the third in a series of field hearings designed to elicit the analyses and opinions of a broad array of participants in the municipal market -- our first hearing was in San Francisco last September, and our second was held in Washington, DC in December.
We scheduled these hearings because we believe policy-makers should be informed by experiences of those who live and work outside of Washington, D.C. This is particularly true with respect to municipal securities, given their impact on local communities and retail investors.
In addition to these field hearings, our team has spent a tremendous amount of time over the past year meeting and speaking with interested parties on issues spanning from disclosure to accounting to market dynamics to credit ratings, and beyond. I can say from experience –- having participated in most of these meetings –- that this has been an extremely interesting, informative and rewarding process.
As we draw to the close of the “information gathering stage” of our initiative, Commission staff will begin to prepare a report concerning what we have learned, including their recommendations for further action that we should pursue. These may include recommendations for changes in legislation, regulations, and industry practice.
A BROADER IMPACT
The SEC’s focus is and should be on protection of investors. However, investors who place their funds in municipal securities often are also residents and taxpayers of those municipalities. And, investors, taxpayers and municipal officials often have the same concerns about transparency and fair dealings in municipal finance.
The case that may most starkly illustrate the alignment of investor and taxpayer interests happened right here, in Jefferson County.
In 2009, an SEC enforcement action resulted in a settlement with JP Morgan, which we asserted used corrupt political contacts to win the role of underwriter for sewage system bond offerings -- and then helped Jefferson County enter into some of the financing and refinancing strategies that cost county ratepayers hundreds of millions of dollars. As a result of the SEC action, JP Morgan paid a $25 million penalty, which was sent to Jefferson County, and also paid Jefferson County an additional $50 million in compensation. And, most significantly, JP Morgan agreed to cancel more than $647 million in claimed termination fees.
But, I strongly suspect that enforcement alone is cold comfort to many of those who have been affected by what has happened in Jefferson County.
As you know, this has been a particularly difficult time. Over the past month, the County has been operating under a standstill agreement, in an attempt to avoid filing for bankruptcy. While our project began over a year ago, the confluence of events highlights the importance of municipal securities not only to the securities market and investors, but also to communities and taxpayers. It reinforces the fact that investors need to get good information from municipalities, and municipalities need to get fair and honest advice from financial professionals.
We are here to explore whether investors need additional tools so that they can make better decisions and whether regulators need additional tools to do their best to enhance the soundness of, and investor confidence in, the municipal securities markets.
OVERVIEW OF TODAY’S HEARING
Today’s panels will focus on issues related to distressed communities, small issuers, disclosure, derivatives and pre-trade price transparency.
Our first panel on distressed communities will explore some of the causes of financial distress for municipalities, the options available to distressed municipalities, including bankruptcy, and the consequences of various courses of action.
Next, our panel on small issuers will provide an opportunity to hear about the practical implications of issuer size on issuers’ activities in the market, their interactions with financial intermediaries and their ability to meet regulatory requirements.
And, our panel on derivatives will touch on municipal entities’ use of derivatives, municipal officials’ understanding of derivatives’ risks, the role of other market participants in municipal derivatives, and disclosures relating to these complex agreements.
We will also be addressing the two topics that have been our principal areas of focus: disclosure and pre-trade price transparency.
On disclosure, we have heard consistently that investors need more timely and accurate information from issuers in order to make informed decisions. On the other hand, we hear from issuers about the practical limitations they face: difficulties aggregating fiscal information from constituent governments, resource constraints and other challenges. Our panel on disclosure will feature issuer and investor representatives, and I look forward to an engaging discussion exploring both sides’ perspectives.
Regarding pre-trade price transparency, investors tell us that they face challenges because municipal securities – like other types of bonds – are traded for the most part through decentralized, dealer intermediated, over-the-counter markets. Unfortunately, information about quotes and trading interest in these markets is not readily available to retail investors.
Great strides have been made in terms of post-trade transparency of information in the last few years, thanks to real-time reporting and the EMMA system available via the website of the Municipal Securities Rulemaking Board, or MSRB. However, because of the low liquidity levels of many municipal bonds, trade data can be weeks or months old –- and, therefore, not very helpful to investors who are trying to assess bond pricing.
Investors need better information and better access both to tap liquidity and to provide it. Our panel on pre-trade price transparency will focus on the existing landscape for pricing information in the municipal market, and ways in which the market can move toward giving investors better information, and consequently, greater confidence in pricing.
We have gathered an impressive group of knowledgeable individuals representing a wide spectrum of viewpoints for all our panels today, and I am confident that they will shed light on –- and advance the discussion of –- all of these important issues. What we hear from today’s panelists, along with what we have gleaned from our prior hearings and countless meetings and conference calls, will be instrumental in informing the recommendations that will be included in the SEC staff report.
And now, let me introduce you to my colleagues who are here with us today. I am joined at this table by Robert Cook, the Director of the Division of Trading and Markets, the Division that helps the Commission carry out its mission of maintaining fair, orderly, and efficient markets for the benefit of investors. Robert’s division currently houses the SEC’s Office of Municipal Securities.
Our role will be to listen, learn and engage with the panelists by asking questions. And, in addition to welcoming you, I must remind you, on behalf of myself and all other Commission participants, of the Commission's standard disclaimer –- that is that our remarks today represent our own views, and not necessarily those of the Commission, other Commissioners, or members of the staff.1
The moderators of today's panels are Dave Sanchez, Attorney-Fellow, Office of Municipal Securities, Division of Trading and Markets; Amy Starr, Chief, Office of Capital Market Trends, Division of Corporation Finance; and Alicia Goldin, Special Counsel, Office of Chief Counsel, Division of Trading and Markets. My appreciation goes as well to my counsels Cyndi Rodriguez and Lesli Sheppard who have been by my side throughout this effort, to the entire team of municipal securities experts at the Commission – including Will Hines, from the Division of Corporation Finance and Suzanne McGovern from the Office of Compliance, Inspections and Examinations – who are here with us today; and to all of those who are busy at work back in DC, including Rachel Hurnyak from Chairman Schapiro's office who has handled the logistics for all of our hearings. Rachel has been incredibly helpful to us up until her very last day at Commission headquarters –- which happens to be today –- and we will miss her greatly. We also want to thank Ammani Nagesh, from Chairman Schapiro’s office -- who probably greeted you as you walked in today –- and who is ensuring that today’s event runs smoothly. And, we are happy to be joined as well by the Director of the Commission’s Atlanta Regional Office, Rhea Dignam, as well as Peter Diskin from that office, Judy Burns from the Office of Public Affairs and our audio-visual experts, Myron Fears and Tony Cook.
I would also like to welcome and introduce our fellow regulators in attendance: from the MSRB, we have Ernie Lanza, Deputy Executive Director and General Counsel and from the Financial Industry Regulatory Authority (“FINRA”), we have Malcolm Northam, Director of Fixed Income Securities. The MSRB and FINRA, as you know, play critical roles in regulating professionals who operate in the municipal market and their assistance has been invaluable.
Also participating in today’s event are former SEC Commissioner Rick Roberts and the Director of the Alabama Securities Commission, Joe Borg. We have with us as well a number of other highly knowledgeable state and local officials — Luther Strange, Alabama Attorney General; Bob Scott, Assistant City Manager and Chief Financial Officer of the City of Carrollton, Texas; Charlie Duggan, City Manager of the City of Auburn, Alabama; Ben Watkins, Director of the Division of Bond Finance for the State of Florida; and Mary-Margaret Collier, Director of the Office of State and Local Finance in the State of Tennessee. I am also delighted that Treasurer David H. Lillard from the State of Tennessee and, I believe, a number of Jefferson County Commissioners are in the audience today. And of course, we are extremely grateful to all of our panelists for agreeing to participate in our field hearing – many of whom have travelled in order to join us today. Thank you.
Last, but not least, I’d like to thank Chairman Bachus for taking a strong interest in these important issues. We very much appreciate the assistance that Chairman Bachus’s staff has provided as we planned this hearing, and we are pleased that Larry Lavender, Walton Liles and Kevin Edgar are here with us today.
I would now like to welcome Larry Lavender to make a few remarks this morning.
[Larry Lavender Remarks]
Thank you, Larry. I will conclude by providing a brief overview of the mechanics of today’s hearing.
STRUCTURE OF TODAY’S HEARING AND OTHER LOGISTICS
We have an exciting agenda for today –- packed with interesting and timely topics. The format of today's field hearing will entail five panels. As moderators, Dave, Amy and Alicia will introduce their topics and panelists. Each panelist will then make brief opening remarks. Following the opening remarks, the panelists will be asked questions by the moderator and those of us at this table.
We will look to each panel to help us to understand better the particular concerns of different market participants, highlight key areas for improvement, and provide some concrete ideas for moving forward. At our past hearings, panelists have engaged with us and with each other in candid and lively discussions, and I look forward to similar engagement today.
A few housekeeping items before we begin. First, we'd like to ask the panelists, moderators, and other questioners to please stand your nameplate vertically when you would like to speak. Second, there will be a lunch break from 12:30 to 2 p.m. There are a number of restaurants within walking distance of Rosewood Hall. Our last panel of the day will conclude by 4:00 p.m.
A live video stream of this hearing is available on the Commission’s website. Additionally, a written transcript of today's event will be made available on the Commission's website, as well as any written statements and presentations provided by the panelists.
Finally, we encourage investors and all other interested parties to submit comments related to the municipal securities market by using the comment form on the SEC website or sending an e-mail to firstname.lastname@example.org.
Again, we’re so pleased that you are here today and hope this will prove to be an enlightening experience for all.
I will now turn it over to Dave to start our first panel.
1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publications or statements by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, other Commissioners, or the staff.