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Remarks to the SEC Fixed Income Market Structure Advisory Committe

July 29, 2019

As Prepared for Delivery

Thank you, Michael [Heaney]. Good morning everyone. Thank you all for being here. I want to extend a warm welcome to our newest Commissioner, Allison Lee — Welcome back to the Commission and to your first FIMSAC meeting. We have a full agenda today with four panels, including recommendations from the Corporate Bond Transparency Subcommittee and the Municipal Securities Transparency Subcommittee. We will also hear updates from the Technology and Electronic Trading Subcommittee and the ETFs and Bond Funds Subcommittee. I will endeavor to be efficient, as I know we are all eager to engage on these substantive matters.

At the outset, I want to sincerely thank all the members of the FIMSAC for your service. You have done excellent work and the Commission appreciates your informed and thoughtful recommendations on, in many cases, complex issues.

You have not shied away from vexing and potentially contentious matters and, at the same time, have proceeded with rigor and respect for each other’s views.

I also want to note that we have two members who will be departing FIMSAC soon—Carole Brown, who was the CFO of the City of Chicago and represented the municipal issuer perspective, and Amar Kuchinad, who was the Chief Strategy Officer for Trumid Financial LLC and represented a trading platform perspective. I want to take this opportunity to say a specific thank you to Carole and Amar.

As my fellow Commissioners and I emphasized at the inaugural meeting, our aim is for this Committee to be a valuable use of your time. Now, one and a half years later, I can tell you that the issues you’ve raised and recommendations that you’ve provided have indeed helped inform policy decisions and spur action by the Commission and FINRA.

To that end, I am pleased to announce that we are extending the Committee’s charter for one year to allow the Committee to engage with FINRA, the Commission and other interested parties as we consider and, to the extent deemed appropriate, implement the recommendations of the Committee. We also would greatly appreciate it if you would continue to use this forum to keep the Commission apprised of developments in the fixed income market.

Since the FIMSAC was created in November 2017, each meeting has been insightful and constructive. FIMSAC has issued eight recommendations on seven topics, with two more recommendations to be considered today. That is productive by any measure. We very much appreciate these recommendations, and, as we move to the next phase, I wanted to give you a sense of where we stand. In response to two of FIMSAC’s recommendations, FINRA has published for comment both a framework for a corporate bond block size pilot and a rule proposal for new issue reference data for corporate bonds. Both of these plans explore challenging terrain, but we are better for the work to date.

I thank FINRA for their willingness to take the lead on these matters. Our staff — many of whom are here today — stands ready to engage with FINRA on these issues.

In response to other FIMSAC recommendations, the SEC staff is also actively considering the regulatory framework for fixed income electronic trading platforms, as well as issues related to a classification scheme for exchange-traded products. Our staff is also engaging with FINRA to evaluate the practice known as “pennying” in the corporate bond market. This is just a short summary of the work being conducted in response to your efforts, and, to be clear, we also are working on the recommendations I did not mention specifically.

Turning to the agenda, I especially am looking forward to the discussion on the content and timeliness of municipal issuer disclosures. This is an important topic that I have addressed before.[1]

In particular, the timeliness of municipal issuer financial reporting is an area I believe can and should be improved. It also is an area where we have heard there are questions in the market about the application of our federal securities laws and, in particular, how the antifraud provisions of the federal securities laws apply to information that is made publicly available by municipal issuers through various channels. I have been informed recently that some issuers are receiving advice that, in connection with the distribution of information that is material to an investment decision, disclosing that information to investors on the MSRB’s EMMA system triggers a more rigorous liability standard for that information than disclosing the same information to investors through other means. While I intend to explore the matter further and have not reached any definitive conclusions, in various scenarios I can imagine, I have significant questions about this advice and whether this is correct as a matter of law or policy. I have directed our Office of Municipal Securities to put together a staff legal bulletin summarizing the application of the federal securities laws to various disclosure scenarios, and thank them in advance for their work on this important effort.

One of the two recommendations under discussion today relates to investor education around secondary market liquidity in the market for retail notes. I am glad you are tackling this specific issue where retail investors would benefit significantly from a better understanding of the market function. More broadly, I understand the staff continues to work through your prior recommendation on investor education. I cannot overstate the importance of raising the level of understanding of our markets and retail investment services among our Main Street investors. That is one reason why, in connection with the standards of conduct rulemaking package, we launched a Main Street investor education campaign designed to help retail investors understand key differences between broker-dealers and investment advisers, as well as the fees and costs they are incurring, so that they can make better decisions based on their individual needs and circumstances. This campaign will include short educational videos, updates to our website Investor.gov, and retail investor events around the country.

Again, I thank you.


[1] See Chairman Jay Clayton, Opening Remarks at the Municipal Securities Conference, Dec. 6, 2018, available at https://www.sec.gov/news/public-statement/statement-clayton-120618.
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