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Speech by SEC Commissioner: Enhancing Disclosure in the Municipal Securities Market: What Now?

Commissioner Elisse B. Walter

U.S. Securities and Exchange Commission

The Bond Buyer Presents the 22nd California Public Finance Conference, San Francisco, California

Oct. 19, 2012

Thank you for your kind introduction and for inviting me here this morning. I appreciate the opportunity to share my views on a topic I care deeply about – enhancing disclosure in the municipal securities market.

Before I do, let me remind everyone that the views I will share are my own and not necessarily those of the Securities and Exchange Commission, my fellow Commissioners, or the staff.1

So, here we are in California – in beautiful San Francisco. For better and for worse, California municipal finance is national news.

As an SEC Commissioner, my job in general doesn’t get me involved in the specifics of the individual municipal finance debates covered in today’s news – at least not in my official capacity.

My job is to protect investors in the roughly $4 trillion municipal securities market, maintain fair, orderly and efficient markets, and facilitate capital formation.

And, as a member of the Commission that serves the public as the investor’s advocate, I want to remind everyone that, without the trust and willingness of investors, projects that are critical to our country’s infrastructure could suffer. These include vital projects such as water, schools, roads, hospitals, and many others.

Today, I’d like to talk about the importance of better protection for muni investors and how the Commission under Chairman Schapiro’s leadership is enhancing investor protection. I’ll also share my personal observations on the “what now” question that follows the issuance of our recent Report on the Municipal Securities Market.

As I walk through this, I want to make it clear that your support in these efforts is critical – that whatever we do, it will be done better if we have your input and support.

Right now, investors have a problem. But it’s also a problem for anyone relying on the vital projects financed by municipal bonds. That includes investors, municipalities, and taxpayers.

If investors decide that the disclosures made to them don’t provide the clear, comparable, and complete information they need and are entitled to by law – what happens?

I don’t even want to think about it.

Municipal bond disclosure is critical to investor protection and the functioning of the municipal marketplace as well.

Looking to the Past

For the last three years, I’ve been reminding market participants, investors, and market observers – in fact the whole world – that, under existing law, municipal investors get what I call “second-class” status.

That is because the SEC, the only Federal agency charged with protecting investors in our capital markets, has only limited authority to protect these unfortunate “second-class” investors (who, I’d like to remind everyone, comprise a significant portion of the electorate).

Existing law expressly excludes direct SEC regulation of municipal disclosure other than by enforcement of antifraud provisions. There are exemptions from offering registration and continuing reporting for municipal securities.

More significant, we can’t set baseline disclosure standards for issuers of municipal bonds or require that municipalities make fundamental information – such as audited financial statements – available to investors.

Essentially, the SEC can only provide indirect oversight in the municipal market – through regulation of the intermediaries who underwrite and sell municipal securities and, under Dodd Frank, regulation of those who provide financial advice to municipalities. We also enforce the Federal securities law antifraud provisions. Some refer to this as the “nuclear option,” although to my mind that label is a misnomer.

This situation has to change.

As one SEC Commissioner said, “mandatory, minimum disclosure requirements for municipal issuers are appropriate, are necessary, and are virtually inevitable.”2

Now, with munis so much in the news, you might think that’s a recent comment by a current Commissioner.

I wish it had been mine. But, it was actually made by Commissioner John Evans during his address to the Municipal Finance Officers Association over three decades ago in 1977.

Of course, Commissioner Evans wasn’t alone in raising his voice in support of enhancing disclosure in the municipal marketplace. In 1976, Commissioner Al Sommer had expressed his concerns that muni investors lacked vital information and that what little information that was available was often of questionable credibility.3

And, since Commissioners Evans’ 1977 statement, SEC Chairmen David Ruder, Arthur Levitt, Christopher Cox, and most recently, our current Chairman, Mary Schapiro, have raised their voices on inadequate disclosure.

In the past few years, Chairman Schapiro has led the Commission in taking action designed to foster better accountability and to enhance disclosure.

In 2009, she supported creation of a specialized unit in our Enforcement Division. Led by Elaine Greenberg and Mark Zehner as the unit’s Chief and Deputy Chief, the unit focuses on misconduct in the municipal securities market, including public pension funds. This new focus is paying off. You may already be familiar with many of the unit’s cases. If not, let me give you just a few examples from fiscal year 2012.

Wachovia Bank and GE Funding separately paid a total of $71 million to settle Commission actions for manipulating bids related to the reinvestment of municipal bond proceeds. The two firms also paid another $147 million to other regulators.4

Goldman Sachs settled charges related to pay-to-play violations in Massachusetts by paying more than $10 million in disgorgement and penalties – a figure that includes the largest penalty ever imposed by the SEC for violating MSRB pay-to-play rules.5

Wells Fargo also paid over $6.5 million in connection with its improper sale of asset-backed commercial paper structured with high-risk mortgage-backed securities and collateralized debt obligations to municipalities and others almost exclusively on the basis of credit ratings.6

And, we brought an action against Bruce Cole, former CEO and Chairman of Mamtek US, and his wife, in connection with a scheme to defraud investors in an offer and sale of appropriations credit bonds. Mr. Cole had directed unsuspecting Mamtek employees to take actions that diverted bond proceeds for his and his wife’s personal use and misled city officials and bondholders.7

Enforcement cases like these should encourage better accountability and can also serve to encourage better disclosure. But there are important reasons why, in my view, enforcement alone isn’t enough.

First, enforcement cases happen after violations are committed and investors become victims. Way too often, by the time a violation is discovered, it is too late to make investors whole. And, suddenly, investors’ money isn’t just building roads and schools – it’s likely paying expensive lawyers.

Second, in the “going nuclear” option, getting the answer wrong puts you in the nuclear zone. For example, as some of our enforcement cases demonstrate, under certain circumstances, getting pension disclosure wrong can lead to antifraud charges.

Third, antifraud provisions are broader than disclosure standards, and may not provide ideal guidance for avoiding the next disclosure problem. Now, I recognize that extensive voluntary disclosure guidelines for issuers have been developed through industry efforts. I applaud those efforts to fill in the guidance gap.

But, voluntary disclosure regimes won’t fix the problems.

The market is increasingly complex, which, in turn, leads to less uniform, untimely, and less comparable information.

And, on a human level, when funds are short, voluntary programs—particularly those without a bottom-line, direct contribution to revenue—may unfortunately be the first to go.

The second step that Chairman Schapiro took was moving forward with amendments to Rule 15c2-12. That rule prohibits underwriters from purchasing or selling municipal securities unless they have reasonably determined that the municipality or other designated entity has agreed to make certain key information available to investors – both initially and on an ongoing basis.

In 2010, the Commission adopted amendments that expanded the content and timing of event disclosures in Rule 15c2-12 to further enhance disclosure in the municipal marketplace. These amendments extended the scope of securities covered under the rule, improved the list of events that issuers must disclose, and specifically included disclosure of events that may adversely affect a bond’s tax exemption – including issuance by the IRS of proposed and final decisions about whether the bond can be taxed.

And, our Chairman did not stop there.

Examination To Enhance Understanding

In 2010, she also announced an agency-wide effort to examine the municipal securities market and tasked me with leading that effort. From 2010 through 2012, we listened to municipal market participants in a variety of ways, including at three field hearings held in San Francisco, Washington, DC, and Birmingham, Alabama.

Those efforts culminated in the Commission Report on the Municipal Securities Market that was unanimously approved in July. You can find the Muni Report, as I affectionately call it, on the Commission’s website.8 If you haven’t already, I encourage you to read it.

The Muni Report details extensive information shared with us by municipal market participants and outlines Commission recommendations for addressing their concerns.

These concerns largely fell into two broad categories: market structure and disclosure practices.

Much of the market structure discussion relates to possible improvements in pre- and post-trade transparency and enhanced dealer obligations. I won’t repeat my recent remarks on those topics here. Please take a look at my speech from the recent SIFMA conference for that.9

Let me instead focus on just disclosure practices.

As I mentioned a few moments ago, the Muni Report tells the story of the municipal securities market from the market participant perspective.

It tells the story of market participants who have made and seen significant improvements in the disclosure practices of municipal issuers – due in part to Commission enforcement actions, private actions, regulatory and industry initiatives, as well as through the use of the Internet, the creation of EMMA, and the adoption of the Rule 15c2-12 amendments.

It tells the story of analysts, issuers, and bond counsel who fear a “one-size-fits-all” approach to municipal disclosure.

And, it also tells the story of market participants who have concerns about the disclosure they see from municipal issuers. Concerns such as:

  • missing information about outstanding debt, liens, security, and collateral pledges;
  • incomplete disclosures about the existence of bank loans or loan terms that affect payment priority from revenues; and
  • outdated information relating to the underlying credit or alterations of security provisions.

Market participants also told us about their concerns with practices relating to continuing disclosure. Concerns like:

  • untimely and incomplete filings;
  • undisclosed events that might adversely affect a bond’s tax exemption; and
  • non-compliance with undertakings in continuing disclosure agreements.

The Muni Report also addresses additional disclosure concerns, including those related to Governmental Accounting Standards and the use of uniform accounting standards by municipal issuers. In addition, participants expressed concerns with incomplete and inaccurate information regarding, among other things:

  • pension funding obligations and other post-employment benefits;
  • derivatives exposure; and
  • conflicts of interest.

Now that I’ve walked you through those concerns, the question is: “What now?”

Recommendations to Enhance Disclosure

The Muni Report answers this question with a series of legislative, regulatory, and industry-based recommendations. To enhance disclosure, our legislative recommendations include recommendations to, among other things:

  • grant the SEC authority to set baseline disclosure standards; and
  • require municipal issuers to have audited financial statements, as appropriate.

I realize that some worry we would seek to impose uniform, detailed requirements across the world of municipal issuers. Let me reassure you that we are talking about principles-based requirements that recognize the diversity of the municipal universe.

Unfortunately, prospects for legislation this year appear slim. I remain hopeful, however, that by early next year, we will be able to engage in a robust dialogue on these matters.

Until then, we will continue enhancing and honing our agency’s expertise in the municipal securities market and readying ourselves to move forward with our Muni Report recommendations.

Last month, we welcomed John Cross as the inaugural Director of the Congressionally-mandated Office of Municipal Securities at the SEC. John brings to the agency leadership skills in municipal finance policy, deep expertise in legislative, regulatory, and budgetary tax matters affecting municipal bonds, and extensive private sector municipal finance transactional experience.

Given the significant role that municipal advisors play in this marketplace and the importance of implementing a permanent muni advisor registration scheme and rule, I am very pleased that John has made this rulemaking a top priority for his office. I am already working closely with him on this effort.

The hope is to move forward promptly so that the Commission will be in a position to consider adoption of final rules on municipal advisors sometime in the early part of next year. Of course, we will take the necessary time to try to strike the right balance on this important project.

But even without Congressional action and within the limits placed on SEC authority, there is more that can be done. So, I am ready right now to consider several initiatives that would enhance disclosure in the municipal securities market.

First, as I have been saying since 2009, we should update the Commission’s 1994 Interpretive Guidance on the Antifraud Provisions regarding disclosure obligations of municipal securities issuers and others. This would allow the Commission to provide updated guidance to today’s market through a means other than enforcement action. I think that many would agree with me – this guidance is long overdue.

Second, starting next spring, the Commission should institute annual conferences on the municipal securities market. As discussed in our report, these conferences would invite market participants, regulators, and academics to engage in an open and continuous dialogue about municipal securities market conditions and ongoing issues.

Third, while not optimal, the Commission should consider whether further amendments to Rule 15c2-12 are appropriate.

In May 2010, the Commission reiterated that it interprets antifraud provisions of the federal securities laws to require municipal securities underwriters to have a reasonable basis for recommending any municipal securities including a careful evaluation of the likelihood that a municipality will make the ongoing disclosure called for under Rule 15c2-12. The Commission further indicated that it was doubtful that an underwriter could form a reasonable basis to recommend a security if the municipality had a history of persistent and material non-disclosure.

Unfortunately, even after repeated disclosure delinquencies, underwriting continues. And that appears to be more the rule than the exception. The Commission could consider cracking down on this practice by applying an even stricter interpretation. Alternatively, the Commission could consider amending Rule 15c2-12. One way to do that would be to codify a prohibition, like a three-strike system, where an underwriter could not underwrite, or the municipal issuer would strike out, if the issuer failed three times in prior undertakings to meet its continuing disclosure obligations.

Many will say that these are extreme options. But, in the absence of legislation, we need to think about whether to place even greater burdens on the market intermediaries we regulate to address this significant source of investor harm.

I have been quite vocal – inside the agency, and outside, in the presence of market participants and other regulators – about the imperative of taking real steps to protect muni investors.

Market participants can also do their part. Based on what we learned during the agency’s examination of the municipal securities market over the last couple of years, there appear to be a number of areas where specific demands for enhanced disclosure aren’t being met.

I’d like to share with you today what I’ll call a “Top 10 List of Dos and Don’ts” that I hope will inspire improvements in municipal securities disclosure and timeliness. These represent just a few concrete steps that market participants can take now towards meeting demands for enhanced disclosure.

Please keep in mind, though, that this list is non-exclusive and non-exhaustive. I think sharing my “Top 40” list this morning might be a little counter-productive, given the time.

Let me start with five Dos:

  1. Do provide current financial information and update material financial information known to be outdated and misleading. Make clear what accounting principles are being followed and explain those principles. If they differ from GASB GAAP, for example, explain how.
  2. Do take appropriate steps to prevent dissemination of materially false or misleading information and consider establishing disclosure controls and procedures and effective internal control over financial reporting.
  3. Do enhance disclosure by giving investors the information they need. For example, disclose material liabilities such as material pension and health care obligations. Disclose material risks that could affect the tax exempt status of bonds being issued, including those arising from the use of bond proceeds and other representations. And, if a transaction involves derivatives, disclose the swap curves (or yield curves) at the time of execution as well as any side agreements with swap advisors.
  4. Do highlight information that investors need in a manner that brings this information to their attention, using language that all investors can understand. Try to avoid complex, legalistic, and opaque language when describing important information like the use of bond proceeds and other sources of funds. And, consider whether “tear sheets” or other effective summaries would be appropriate to convey information in a more concise manner.
  5. Do use web sites with carefully prepared information to communicate with investors and the market and bear in mind that the Commission provided guidance on the use of company websites in the corporate context that can be relevant and helpful to those in the municipal marketplace, too.

Now, on to the Don’ts:

  1. Don’t forget about the auditor’s consent where audited financial statements are used. Don’t neglect to obtain it or omit disclosure regarding the lack of any subsequent event analysis by the auditor and the fact that any unaudited financial statement disclosure was not reviewed by the auditor.
  2. Don’t, if you are a conduit issuer and there is credit enhancement or a letter of credit backing the payment on the securities, omit information on the underlying obligors in primary offerings or in continuing disclosure documents.
  3. Don’t omit information about conflicts of interest. Include details about underwriting arrangements that raise conflicts of interest and disclose information that addresses the qualifications, level of diligence, and disinterestedness of swap and independent financial advisors.
  4. Don’t ignore obligations contained in continuing disclosure agreements – disclose material events as required by Rule 15c2-12 in keeping with the spirit of that rule.

And, finally:

  1. Don’t forget the importance of filing timely, accurate, and complete information on EMMA. Investors and the marketplace are relying on this.

Before I conclude my remarks this morning, let me also mention one more thing that’s come to my attention in recent weeks. I have heard tales that some municipal securities issuances may be masquerading as general obligation bonds in a manner that, although possibly accurate in a technical sense, may obscure the real source of repayment. If these tales are true, that’s probably another Don’t for the list I just mentioned. Please don’t hide information from investors in this way.


Considering the challenges we face, I am pleased by our forward progress on enhancing municipal disclosure and remain committed to moving further ahead.

Nonetheless, right now, too many investors aren’t getting the answers they need, even to their most basic questions.

At the same time, I hear that many municipal issuers are reluctant to voluntarily alter disclosure practices because advisors warn of potential legal risk – which may or may not be true.

These are areas that I believe the SEC must address. But, our efforts alone only get us part way there.

We need your help.

Investors and municipal issuers both need good information and fair and honest advice from their advisors. Regulators need good information as well. Good information should make life better for everyone in the municipal marketplace.

Given this common ground, I believe that working together to enhance disclosure in the municipal marketplace makes sense. I’ve talked this morning about some of the steps each of us can take now to move forward with enhancing disclosure.

There is far too much at stake for any of us to accept the status quo.

Thank you, and enjoy the remainder of your conference.

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.

2 Commissioner John R. Evans, “The MFOA and Municipal Disclosure,” (November 4, 1977), available at

3 Commissioner A.A. Sommer, Jr., “The Changing Scene for Municipal Securities,” (March 11, 1976), available at

4 Securities and Exchange Commission v. Wachovia Bank, N.A., now known as Wells Fargo Bank, N.A., successor by merger, Civil Action No. 2:11-cv-07135-WJM-MF (D.N.J. Dec. 8, 2011), available at; Securities and Exchange Commission v. GE Funding Capital Market Services, Inc., Civil Action No. 2:11-cv-07465-WJM-MF (D.N.J. Dec. 23, 2011), available at

5 In the Matter of Goldman, Sachs & Co. Release No. 34-67934, A.P. File No. 3-15048 (September 27, 2012).

6 In the Matter of Wells Fargo Brokerage Services, LLC, n/k/a Wells Fargo Securities, LLC and Shawn Patrick McMurtry, Release No. 33-9349, 34-67649, A.P. File No. 3-14982 (August 14, 2012).  

7 SEC v. Bruce Cole and Nanette Cole, United States District Court for the Central District of California (Case No. CV 12-8024 ABC (SHx)). 

8 Available at

9 Commissioner Elisse B. Walter, “Bringing Municipal Bond Trading Into the Light,” (October 1, 2012), available at

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