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
San Francisco, California
September 21, 2010
Good morning. Welcome to the Securities and Exchange Commission's inaugural field hearing on the State of the Municipal Securities Market. We are grateful that state and local government officials, municipal securities investors, and experienced municipal market professionals have agreed to participate as panelists in today's meeting. Thank you so much for devoting your valuable time to this important effort. And, we are looking forward to an instructive day, listening to these participants' comments, insights, and recommendations on critical issues in the municipal securities market — particularly in the areas of disclosure, credit ratings, significant liabilities, internal controls and investor experiences. We also look forward to any written materials the participants here today and all other interested persons submit for the record.
As you know, the purpose of these hearings is to explore the issues relating to the municipal securities market that arise under the federal securities laws. At the conclusion of all of the hearings, the Commission staff will prepare a report concerning what we have learned, including their recommendations for further action that we should pursue, which may include legislation, rulemaking and changes in industry practice. These hearings will be instrumental in informing those recommendations. Thus, the Commission's standard disclaimer, which I make for myself and all other Commission participants, is particularly apt — that our remarks today represent our own views, and not necessarily those of the Commission, other Commissioners, or members of the staff.1 And, I would like to add that the views we express today may well change in light of the valuable input we will receive today and throughout the course of the field hearing process.
Before I go any further, I would like to introduce you to my colleagues and our fellow regulators, who are here with us today. Joining me on the stage will be two of the Commission's senior experts in this area — Meredith Cross, Director of our Division of Corporation Finance and Henry Hu, Director of our Division of Risk, Strategy, and Financial Innovation.
The moderators of today's panels are two staff members, well-known to most of you — Amy Starr, Senior Special Counsel for Capital Markets, Office of the Chief Counsel, Division of Corporation Finance and Martha Haines, Chief of the Office of Municipal Securities, Division of Trading and Markets. My appreciation goes as well to Kayla Gillan, Chairman Schapiro's Deputy Chief of Staff, who is leading this effort for the Commission, my counsels Alicia Goldin and Lesli Sheppard who have been indispensable to this effort, and Rachel Hurnyak from Chairman Schapiro's office who has handled the logistics for this hearing and has done a phenomenal job of keeping us all organized.
I am also very pleased that we are joined today by Mike Rufino of FINRA and Alan Polsky and Lynette Hotchkiss of the Municipal Securities Rulemaking Board (MSRB). The MSRB and FINRA, as you well know, play critical roles in regulating professionals who operate in the municipal market and their assistance has been invaluable. Among those participating as panelists are several knowledgeable state and local officials — the Honorable Bill Lockyer, California State Treasurer; the Honorable Jim McIntire, Washington State Treasurer; the Honorable Michael Belsky, Mayor of Highland Park, Ill.; David Crane with the Office of Governor Schwarzenegger; Mark Blake, Deputy City Attorney of San Francisco; Brian Mayhew, Chief Financial Officer for the Bay Area Toll Authority; and Ed Harrington, General Manager of the San Francisco Public Utilities Commission. Additionally, in the audience with us today is California Corporations Commissioner Preston DuFauchard. Welcome and our thanks to you all.
Next, I'd like to provide a brief overview of the current state of the municipal securities market, which will be followed by a description of today's field hearing. And finally, I will highlight for you the types of issues we are hoping to explore during today's panel discussion.
Overview of the Municipal Securities Market
Over the past 30 years, the municipal securities market has grown tremendously on many fronts, and serves as an increasingly significant part of the U.S. capital markets. The current amount of municipal bonds outstanding is estimated to be roughly 2.8 trillion2 and more than $470.5 billion of new bonds and notes were issued last year.3 The Build America Bonds ("BAB") program was launched in April 2009, and as of April 2010, it had enabled states and localities to issue more than $90 billion of BAB bonds to fund new building projects.4
Despite the reputation of the muni market as a "buy and hold" market, trading volume is substantial, with approximately $3.8 trillion of long and short-term municipal securities traded in 2009 in over 10 million transactions.5
With an estimated 51,000 or more state and local issuers6, it is an extremely diverse market. Depending on the type of financing, payments may come from general revenues of the municipal issuer, specific tax receipts, revenues generated from a public project or other specific revenue, payments from private entities or from a combination of sources. The interest paid on municipal debt securities is often, but not always, exempt from federal income taxation and, in some cases, also may be exempt from state income and other taxes.
Retail investors hold approximately 36 percent of outstanding municipal securities directly, up to another 34 percent indirectly through mutual funds and closed-end funds7, and retail-sized trades account for roughly 81 percent of trading volume.8
And, in spite of their well-deserved reputation for safety, municipal securities can and do default. From 1999 to 2009, issuers defaulted on over $24 billion in municipal bonds out of a total of $3.4 trillion issued. In 2009 alone, 194 municipal bond issues defaulted with an overall dollar amount of almost $7 billion in bonds.9
It is hard to overestimate the importance of the municipal securities market to building and maintaining the infrastructure of our nation. The billions of dollars that the muni market raises each year supports projects that are needed by all of us as taxpayers and residents in the towns, cities, counties, and states across our country. Many of us also play a dual role in the market. Not only are we recipients of the benefits that our states and localities provide with the funds they raise, we are also the source of those funds — as purchasers of municipal securities. A core mission of the SEC is to protect investors and we are here today in furtherance of that mission — specifically, to focus on protection of those purchasers of municipal securities.
Despite its size and obvious importance, the municipal securities market lacks many of the protections customary in many other sectors of the U.S. capital markets. Investors in municipal securities should have the same rights as investors in other types of securities to receive information that is not materially misleading and does not contain material omissions — that includes receiving financial and other material information that is not stale. These precepts are central to informed investment decision-making and investor protection. As I have previously bemoaned, investors in municipal securities are, in certain respects, afforded "second-class treatment" today.10 I, for one, believe that needs a hard look.
Some have suggested looking to the corporate disclosure scheme as a framework for municipal disclosure. I believe that we can learn from the corporate world, but it is also essential that we recognize the differences in the municipal and corporate finance worlds and that we work together to evaluate what an appropriate framework for municipal finance disclosure should be in the future.
Introduction and Format of Today's Field Hearing
Chairman Schapiro shares my interest in strengthening investor protection mechanisms applicable in this important sector of the capital markets, which is why she has 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.11 As the Chairman has noted, to grapple with the complex issues presented by the municipal securities market, we need to harness the ideas of a wide range of people who have experienced this market from many different perspectives.12
Over the course of the next several months, we anticipate holding additional field hearings in Chicago, Washington D.C., Birmingham, Ala., Tallahassee, Fla. and Austin, Texas. Each field hearing will include participants from the local region and will examine different sets of issues. The Western Region is an essential player in this market, and holding our first hearing here in San Francisco will provide us an important base of information going forward.
I view these field hearings as a fantastic opportunity to take a fresh look at the way the municipal securities market works and to effect real regulatory change. I am confident that by soliciting input from market participants around the country, our staff will be well equipped to develop meaningful and practical recommendations to improve the state of the market.
We have an impressive group of panelists lined up for the day, and on behalf of my colleagues and myself, I would like to thank all of them for so generously agreeing to participate in this field hearing. A heartfelt thank you also goes to our host for today's event — the Port of San Francisco — and Monique Moyer, its Executive Director, who has been incredibly helpful and welcoming to us.
The format of today's field hearing will entail five panels covering topics relating to disclosure, credit ratings, significant liabilities, internal controls and investor experiences. Once I conclude my opening remarks, we'll launch right into the first panel.
As moderators, Amy and Martha will introduce their topics and panelists. Each panelist will then make brief opening remarks. The moderator, Meredith, Henry, and I will then ask the panelists some questions. We look forward to a lively and fruitful discussion, and I encourage the panelists to engage in a dialogue with each other in addition to addressing our questions.
Our agenda for today is certainly ambitious. We will be covering a number of complex and interesting topics and 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. I want to emphasize that last point — this endeavor is about the desired future state of the market.
I am particularly excited about this first field hearing, as today's panels will be addressing two areas that I care deeply about: transparency and the investor experience. Let me tell you a bit about what we hope to address on each of the panels:
Our first panel of the day — entitled Selected Disclosure Practices: Transparency and Presentation — will touch on a number of important substantive topics, including: disclosure of "key" or material events and conflicts of interest, such as broker-dealer affiliate relationships and issues relating to the role of insurers and credit enhancers, including, for example, credit worthiness and consequences of default by an insurer or credit enhancer and disclosure of issuer information in the presence of insurance or credit enhancement.
The disclosure panel will also address important issues surrounding timing, availability, and format of disclosure, including: transparency of pre- and post-trade information; timeliness, accessibility and clarity of disclosure; and presentation or format of disclosure, including disclosure principles, use of an executive summary, comparability of disclosures by different issuers, possible tiering of disclosure requirements, and voluntary data-tagging.
Because it has long been my view that our principal goal in this area should be to improve the quality and timeliness of information available to municipal securities investors,13 I am especially interested in hearing from this first panel.
Our second panel: Ratings — Impact and Practices — will explore: rating agency practices and protocols, for example, comparing the way ratings firms handle municipal securities and corporate securities; the impact of bond insurance on ratings; comparability of ratings from different agencies; and conflicts of interest.
After lunch, we will jump into our third panel — Disclosure of Certain Significant Liabilities — which will focus on public pensions, retiree health, and derivatives. For instance, how reliable are asset and liability valuations and underlying assumptions with respect to pensions and retiree health? Do we have appropriate accounting standards for reporting the economic value of pension liabilities? How do issuers of variable rate debt use derivatives for purposes of hedging interest rate risk? What kinds of disclosure do issuers make regarding their use of derivatives? How can we address better the needs of investors and regulators?
Next, we will focus on disclosure controls and internal controls, including standards for issuer officials who approve offering documents and best practices for disclosure controls involving securities offerings and secondary market disclosure.
Last, but certainly not least, we will hear from investors. In order to think about ways in which we can combat the "second-class" treatment of municipal securities investors, we need to listen to investors and understand their needs: Tell us about yourselves. What prompted you to invest in municipal securities? How do you go about investing? Do you use an intermediary? What kinds of information does your advisor or salesperson provide you about your investing options? Do you conduct other research before investing? Have you found information about the municipal securities market to be accessible and clear? What kind of information would be most helpful to you in making investing decisions in the municipal market? In what form would that information be most useful? Do you have specific complaints about your experience as a municipal securities investor? How does your experience investing in the municipal securities market compare with your experience investing in other parts of the capital markets? Do you think the municipal securities market is fair?
At our future hearings, we will revisit some of these topics, and cover many others, such as: investor protection; investor education; financial reporting and accounting; the Municipal Securities Rulemaking Board; municipalities acting as conduit borrowers for private companies or non-profit entities; market stability and liquidity; offering participants, professionals and market intermediaries; Build America Bonds and other taxable municipal securities; and 529 Plans.
We encourage investors and all other interested parties to submit comments related to the field hearing topics and any other topics related to the municipal securities market to assist the Commission staff in determining whether to recommend changes to laws, regulations, or best practices to better protect municipal securities investors. Comments may be submitted by using the comment form on the SEC website or sending an e-mail to email@example.com.
The Commission is committed to a strong and vibrant municipal securities market, and I know that our talented and dedicated staff is already hard at work thinking about these issues and developing possible regulatory and market participant responses. I hope that today's presentations and our upcoming field hearings will help inform us in taking the right steps to ensure the integrity of this vital market. Our panelists today represent a range of constituencies, including: state and local government, regulators, national associations, retail and institutional investors, and various market participants. We are privileged to have them here, and grateful for the effort they have made to take part. We look forward to a spirited and substantive discussion.
A few housekeeping items. First, we'd like to ask the panelists, moderators, and other questioners to please stand your nameplate vertically when you would like a turn to speak. Second, there will be a lunch break from 12:15 to 1 p.m. and our last panel of the day will conclude at 4:30 p.m. Finally, a transcript of today's event will be made available on the Commission's website, in addition to any written statements provided by the panelists.
I'll now turn it over to Amy Starr, who will introduce our first panel to you.