Speech by SEC Chairman:
Remarks at the Municipal Market Roundtable
by Chairman Arthur Levitt
U.S. Securities & Exchange Commission
SEC Headquarters, Washington, D.C.
October 14, 1999
Thank you, and good morning. It is a pleasure to welcome you to the SEC Roundtable on the Municipal Market. I'd like to start off by thanking the moderators and the panelists for agreeing to participate in this important endeavor. I also want to thank everyone on the staff who worked to make this event possible.
Over the past year, a lot of my time has been dedicated to issues involving regulatory modernization, market structure and financial reporting. But one of my first priorities when I came to the Commission was in the municipal market, and it remains an area of immense importance. I'm glad we can all gather today to assess where we've been and more importantly to refocus on where we're going.
Six years ago, the need for reform in the municipal bond market was obvious. This huge, $1.3 trillion market, once primarily the domain of institutional investors, was now dominated by individuals. But practices had not evolved accordingly.
Official statements in primary offerings had long been difficult to obtain. If available, the disclosure was often less than desirable. Voluntary efforts to improve disclosure, while noble, had produced no discernible results. After issuing bonds, few of the 52,000 issuers of municipal debt provided any form of ongoing disclosure, and no central place existed to which an investor might go to find out the current condition of a bond issued years ago.
That same investor had no ready means to find the current price of bonds he held, or even to determine whether the price he just paid was fair. Transparency did not exist. The core of our federal securities laws – the antifraud provisions – governed transactions in municipal securities, but municipal bond matters rose to the enforcement agenda infrequently at best. Regulators did not have audit trails and worked in an uncoordinated fashion in policing the market.
What's more, corruption and conflicts of interest that would have stirred the envy of Boss Tweed had tarnished the reputation of the municipal market, overshadowing the many honest and diligent people who work there as well. Labeled by one financial magazine as "America's notoriously corrupt municipal bond market," was not the way to enter the 21st century.
We had no choice but to act. I put municipal market reform at the top of my agenda. And, fortunately, so did many of you. Through a partnership between the Commission and those in the industry, we crafted a framework for secondary market disclosure through the amendments to rule 15c2-12.
Our efforts were not a consequence of market catastrophe, but a product of our work together. We hoped our reforms would be in place before the next crisis. Little did we know how soon it would come. Within the month of our adoption of continuing market disclosure, and months away from its effective date, Orange County, California filed for bankruptcy in what remains the largest municipal bankruptcy in the history of the United States.
As often occurs, out of the ashes of this tragedy came many important and timeless lessons such as the need for both prudent management of public funds and adequate disclosure of purposes of governmental borrowings and the risks associated with financings.
Many of our settled proceedings during this time bear out the reports of corruption we found so disturbing six years ago. We initiated and settled proceedings involving hidden payment arrangements, conflicts of interest and kickbacks from New England through the mid-Atlantic, the South, and the West by regional and national underwriting firms. Other proceedings involved yield-burning. Several proceedings remain pending before the courts or the Commission, or under investigation. The message to investors and the municipal market should be clear our Enforcement Division is now a permanent part of the municipal landscape.
Only a few weeks after I was sworn into office, I told the Congress that "to some observers, the most significant flaw in the municipal securities market is the lack of trading
information available to investors and market professionals." Today, in addition to centrally available continuing disclosure for most municipal issues, next-day price and volume information is now available for municipal securities trading four or more times during a trading day. The MSRB has proposed to expand the data available and provide it free of charge over the Internet to subscribers. The Board expects this data to cover on average 9000 individual transactions in approximately 1000 frequently traded issues each day.
This MSRB program also provides the Commission and NASDR with audit trails reports of essentially all inter-dealer and customer transactions. Regulators now have available the footprints of fraud in market transactions. Additionally, this data offers information on municipal market trading activity never gathered before in one place.
Six years ago, I also asked market participants to act together to end pay-to-play the selection of underwriters and other professionals based on political contributions. Dealers quickly responded through adoption of the voluntary ban and the MSRB followed with adoption of Rule G-37. This spring, the dealers were joined by independent financial advisers, who adopted a voluntary ban.
However, one significant party at the transaction table has failed to adopt even a voluntary ban the lawyers. It is unfortunate that the one group of professionals that has a code of ethics is unable to come to terms with a practice that unfairly casts its shadow over those awarded legal work by elected officials.
This summer, the American Bar Association failed to seize the opportunity to incorporate prohibitions on pay-to-play into its model rules of professional conduct. This is a shame. Their clients are far ahead of them in occupying the ethical high ground.
For us, of course, ending pay-to-play is and always has been a matter of market reform, not campaign finance reform. Recent events, such as the conviction of the treasurer of the nation's second largest city for extorting campaign contributions from a manager of public funds, starkly illustrate the problem.
It's been said that trust is won with difficulty and easily lost. Municipal bonds and the municipal bond market have enjoyed a solid reputation because of the valiant efforts of all of you here. We must all work to maintain and enhance public faith in this critically important market.
This morning, at what I hope will be an annual event, we take another step together to help ensure the municipal markets are even more transparent and trustworthy. As you know, we've designed the Roundtable around a series of panel discussions. I'd like to mention a few of the panel topics, and raise some additional, more specific questions that I think should be addressed in each discussion.
Today's first panel will address the issue of primary offering disclosure. Among the questions that should be asked are who is responsible for disclosure issuer, underwriter, lawyer, or financial adviser? Are underwriters given sufficient time to review disclosure documents? Whose document is the Official Statement? Has there been a change in disclosure since publication of the Commission's 1994 interpretive release? Are conflicts of interest being adequately addressed in disclosure?
The second panel will concentrate on secondary market disclosure. First and foremost, has continuing disclosure consistently taken place? If not, why and where do problems exist? Are financial statements and other information reviewed for material changes prior to filing? Has a failure to provide financial information by a deadline been filed with the appropriate bodies?
This afternoon, we will discuss electronic disclosure an issue that is on the minds of all market participants. I would be interested in knowing if potential customers are, in fact, requesting electronic delivery. What qualifies as an investor's consent for receiving electronic disclosure instead of disclosure through the regular mail? What concerns do issuers have about electronic disclosure?
I'm sure all of you are familiar with the city of Pittsburgh's move to sell bonds directly over the Internet. Is this just the beginning of a broader move to the Internet by issuers? And if so, what impact will this have on the marketplace?
And lastly, today's roundtable will focus on the scope of fiduciary duty owed by professionals in a municipal bond offering. What are the functions and responsibilities of a financial adviser? Do underwriters have similar fiduciary duties? What types of conflicts of interest arise? And, under what circumstances do bond counsel have disclosure duties.
Some of you are probably thinking of that line, "Question everything. Learn something. Answer nothing." Well, I hope that, together, we can develop the right answers. During these roundtables, we will listen and we will respond where appropriate. We will continue to offer guidance beyond today's dialogue either informally or formally, through interpretive guidance.
In that spirit, I hope all of you will ask some tough questions and respond with frank and honest answers. If you think that a current practice does not serve investors' interests speak up. If you think that a Commission rule or position is ineffectual please tell us.
Again, I thank you all for being here and I look forward to continuing our work together. Millions of investors and taxpayers would expect nothing less.
Thank you very much.