Statement of the National Association of Bond Lawyers at the SEC Field Hearing,
San Francisco, September 21, 20101
Thank you Commissioner Walter for inviting the National Association of Bond Lawyers (“NABL”) to participate in these timely hearings. I appear today as a representative of NABL, a nonprofit corporation incorporated in 1979, which exists to promote the integrity of the municipal market by advancing the understanding of and compliance with the laws affecting municipal finance. I am currently the President-Elect of NABL, and I recently served as Project Coordinator for the Third Edition of Disclosure Roles of Counsel, a treatise on disclosure in the municipal securities context that was a joint publication of NABL and the American Bar Association. Disclosure Roles was the culmination of a three-year project involving more than fifteen public finance attorneys from across the nation.
NABL is comprised of approximately 2,800 members who specialize in municipal finance, and our members represent all participants in the market. We serve as counsel to issuers, as bond counsel, general counsel, or disclosure counsel, to underwriters, to institutional investors, to trustees, to conduit borrowers, to third-party credit enhancers, and to others — in short, to all participants in the municipal market. Clearly, not all participants are in agreement on all issues. However, we all have a common interest to ensure the standards of disclosure that give confidence to investors in the integrity and efficiency of the municipal market as a key component of our capital markets. Municipal bonds were integral to the stimulus legislation enacted in 2009, including Build America Bonds and other bonds that provided for a direct payment of a federal subsidy to issuers.
NABL recognizes the significant challenges facing municipal and state issuers in light of what has been referred to as the “Great Recession.” To name but a few:
- continued high unemployment, with a corresponding impact on state and local tax receipts;
- the real estate doldrums, and the impact on real property taxes, on assessments and on title transfer revenues;
- the significant depletion in rainy day reserve funds; and
- the numbing shortfalls in pension and OPEB assets — the public pension shortfall alone having been estimated by some as well in excess of $1 trillion and possibly much higher.
NABL recognizes that certain issuers are responding to these challenges in a manner not seen since the 1930’s, with a California city declaring bankruptcy and the capital of Pennsylvania considering, until a last minute rescue by the State, whether to default on a general obligation full faith and credit bond issue. In the current environment, such bankruptcies and defaults are no longer limited to isolated conduit or revenue borrowings.
NABL recognizes the changes in who are the investors in today’s municipal market, with approximately one-third of municipal bonds being owned directly by individual investors and another one-third being held indirectly by individuals through mutual funds.
And finally, NABL recognizes that the municipal market is experiencing intensive scrutiny and legislative and regulatory change, the most significant since the Securities Acts Amendments of 1975. The SEC has amended Rule 15c2-12 and has established a Municipal Securities and Public Pension Unit in the Enforcement Division. The Dodd-Frank Act changed the composition of the Municipal Securities Rulemaking Board (the “MSRB”); expanded the MSRB’s authority, including enhanced cooperation in examinations and enforcement with the SEC and FINRA; required registration and oversight of independent municipal financial advisors; and set forth a Congressional directive to establish an Office of Municipal Securities with a Director reporting directly to the Chairman.
While the Dodd-Frank Act enacted many significant changes in the regulation of the municipal securities market, Congress left intact the basic “principles-based” structure of SEC oversight of this market, which relies on the general antifraud provisions of the federal securities laws to police fraud and abuse in the municipal market and to provide the criteria to assess the adequacy of municipal issuer disclosure. The SEC has adapted such principles-based structure to the municipal market through rulemakings, interpretive guidance and enforcement actions. To be sure, certain advocates have argued that SEC oversight of the municipal market should be conformed to the corporate bond market, and that the Tower Amendment, which exempts municipal securities from the registration requirements of the securities laws, should be repealed. Congress determined to direct the Government Accounting Office to study such repeal. We concur that such a measured and deliberative approach is wholly appropriate in light of the unique nature of the municipal market.
The combination of exemption from registration while being subject to the general antifraud provisions has created a discipline that results in comprehensive disclosure that can be tailored to reflect the unique characteristics of each financing. This is a critical feature of the existing disclosure framework, because unlike corporate debt, there is extraordinary diversity of municipal issuers and issues. There are over 50,000 distinct issuers of municipal securities, ranging from multi-family housing authorities to sewer and water authorities to stadium authorities to general obligation issuers. Last year, over $400 billion of municipal securities was issued.
In addition to the sheer number and diversity of issuers, the municipal securities market also reflects the unique legal status of issuers, which are public bodies that are subject to limits on the powers of government rather than private sector corporations. Issuers are governed by state constitutions, state statutes, interstate compacts, city charters, and municipal codes, which limit their legal powers and allocate legal responsibility among their officers, both elected and appointed. Municipal issuers are also subject to sunshine laws, open meeting laws, Freedom of Information Act requests, and public budget hearings. In the instance of the 50 states, each is itself a sovereign body, with its own constitution, coexisting with the other states and the federal government, as well as retaining certain powers under the U.S. Constitution. As Robert Fippinger points out in his treatise, The Securities Law of Public Finance, “The limitations imposed on public corporations by nineteenth century constitutional conventions, state legislation, and judicial fiat are totally incongruent with the parallel history of private corporations . . . . Laws providing for incorporation of private companies, enacted by legislatures competing for businesses, became relatively more similar at the same time laws creating public corporations were increasingly unique to local circumstances.”
We thought this background was useful in light of the broader audience that this paper may reach. We appreciate that the SEC and the staff have been sensitive to the unique characteristics of the municipal market. As Commissioner Walter noted in her October 2009 speech:
“I fully appreciate that deference should be shown to the special questions concerning disclosure and accounting that municipal securities present; municipal securities should not be treated exactly like corporate securities. Moreover, there cannot be a one-size-fits all approach to municipal disclosure, given the wide range of purposes and structures of the over 50,000 municipal issuers.”
As outlined in that speech, the SEC has an array of tools by which it can provide additional guidance to the municipal market as it continues to evolve. Those tools include additional antifraud actions, updating the 1994 Interpretive Release, and seeking additional authority through legislation. NABL submitted in September 2009 detailed comments on the proposed amendments to Rule 15c2-12. NABL responded in May 2010 to the SEC’s request for suggestions for additional interpretive guidance at such time as the 1994 Interpretive Release is updated and restated. And with respect to the SEC’s enforcement actions in the municipal arena, the Disclosure Roles of Counsel reflected a comprehensive effort by NABL volunteers with expertise in municipal finance to summarize, critique, organize, and provide guidance to the market regarding the lessons to be learned from such actions.
NABL looks forward to the continuing dialogue with the SEC and its staff that these field hearings represent, and we expect to work cooperatively regarding any regulations, interpretive guidance, enforcement actions, or legislation that are aimed at disclosure failures or abuses of the market, that are tailored to the unique legal framework and diversity of the market, and that are intended to lead to a more transparent market for the benefit of all participants.
1 This statement has been approved by the NABL Board. However, in light of the format today by which written questions were not provided in advance, the responses to the questions were not so approved.