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Keeping a Retail Investor Focus in Overseeing the Fixed Income Market

Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

Remarks at the Roundtable on Fixed Income Markets, Washington, D.C.

April 16, 2013

I am very pleased to be here at the Roundtable on Fixed Income Markets.  I strongly support the Commission’s effort to evaluate ways to improve the transparency and efficiency of the fixed income markets.1  Before I begin, however, let me issue the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the U.S. Securities and Exchange Commission (the “SEC”), my fellow Commissioners, or members of the staff.

As an SEC Commissioner, I consider the protection of investors, particularly retail investors, to be my primary obligation.  This is a specific concern in the both the municipal securities and corporate bond markets, where retail investors play an important role.  For example, retail investors are the largest holders of securities in the municipal securities market.2   According to recent statistics, retail investors hold 50% of municipal bonds directly, and another 25% indirectly through mutual funds, closed-end funds, and exchange-traded funds.3  Today, retail investors hold approximately 75% of the $3.7 trillion of municipal debt issued.4  In addition, as of March 2013, retail investors hold approximately 28% of the total outstanding principal value of the corporate bond markets.5  The numbers make it clear – retail investors are significantly invested in these markets.

However, although retail investors are significant participants in both the municipal securities and corporate bond markets, they do not receive the same level of protection in the respective markets.  From a regulatory perspective, one difference is that corporate bonds that are sold to the U.S. investing public are generally required to be registered with the SEC,6 while, in contrast, there is no express statutory authority that requires the registration and reporting of municipal securities to the SEC.7

Simply stated, the municipal securities market, despite its size and importance, has not been subject to the same level of regulation as other sectors of our capital markets.8  The Commission’s investor protection efforts in the municipal securities market has been primarily through the regulation of broker-dealers and municipal securities dealers.9   In contrast with most other public offerings, the Commission does not receive or examine any offering documents related to municipal securities prior to the issuance of the offering documents to the investing public.10  In fact, provisions commonly known as the “Tower Amendments”11 expressly limits the Commission’s authority to require municipal securities issuers, either directly or indirectly, to file any application, report, or document with the Commission prior to any sale of municipal securities by the municipal issuer.12  As stated in the Commission’s July 2012 Report on the Municipal Securities Market (the “2012 Report”),13  “[i]nvestors in municipal securities are often not afforded access to the types of timely and accurate information available to investors in other securities.”  

Just last year, the Commission brought 17 enforcement actions related to misconduct in the municipal securities market, more than double the number filed in 2011.14  As the 2012 Report noted, many of the Commission’s enforcement actions related to the municipal securities market “involved materially misleading statements and omissions in disclosures relating to municipal securities.”  It is clear that a greater focus on this market is needed in order to protect investors.  

However, for both the municipal securities and corporate bond markets, today’s Roundtable is an important step.  As the primary regulator of the U.S. capital markets, the SEC must continuously seek information to understand the current structure of our markets and be able to objectively assess how the markets are functioning.  By facilitating a dialogue between regulators, market participants, and other stakeholders, today’s Roundtable will be a step forward in the process.

In this regard, I note that the majority of the panelists for today’s Roundtable are representatives from the financial services industry.  In fact, out of the 27 panelists, I believe that we only have four panelists who are representing retail investors.  As I said at a Roundtable on market structure in June 2012, it is critically important to have a Roundtable that allows for robust discussion of many views – particularly the views of retail investors.15  These are the investors who, directly or indirectly, provide the bulk of all capital invested in securities. 

I also believe it is also important to have diverse roundtables – not only diversity in thought, but also diversity in gender and ethnicity.  I am particularly struck by the fact that today’s roundtable only has two female panelists, and it appears there are no panelists of color.  Studies have shown that diversity helps bring new perspectives to challenging problems.16  I believe that Commission-sponsored roundtables should reflect the diversity of our nation, and I hope and expect our staff will seek out diverse panelists in future roundtables.    

As to the panelists with us today, I want to thank you for being here today to share your views.  All of you have important information to share with us about the fixed income marketplace, and I appreciate that you’ve taken the time to be with us.

As today’s discussion unfolds, we should remember the needs of main street investors, who deserve a market structure environment that is fair, transparent, and orderly.

Thank you.

1 The U.S. fixed-income market includes municipal securities, corporate debt securities, asset-backed securities, and government-sponsored enterprise securities. Today’s roundtable focuses on the municipal securities market, the corporate bond market, and the asset-backed securities market.  See, “SEC to Hold Fixed Income Roundtable,” available at

2 See, “United States Government Accountability Office Report to Congressional Committees: Municipal Securities: Overview of Market Structure, Pricing, and Regulation” (January 2012), available at

3 Id.

4 See, U.S. Securities and Exchange Commission, “The State of the Municipal Securities Market,” available at

5 See, Federal Reserve Board, “Flow of Funds Accounts of the U.S.” Table L.212 (March 7, 2013).  See, “SEC to Hold Fixed Income Roundtable, available at

6 The Securities Act of 1933 stipulates that all offers and sales of securities must be registered with the SEC unless a registration exemption is available.  The most common exemption used is a combination of Section 4(a)(2) (formerly Section 4(2) of the Securities Act of 1933) and Rule 144A of the Securities Act.  Section 4(a)(2) provides an exemption to registration for securities that are only offered privately, and do not constitute a “public offering.” Thus, securities offered under Section 4(a)(2) are not eligible for resale.  Rule 144A provides a further exemption to securities issued under Section 4(a)(2).  Under Rule 144A securities issued under Section 4(a)(2) could be resold to certain qualified institutional buyers as long as certain conditions are met. 

7 U.S. Securities and Exchange Commission, “Report on the Municipal Securities Market” (July 31, 2012), available at

8 Congress, as part of the Securities Acts Amendments of 1975 (“1975 Amendments” also known as the “Tower Amendments”), created a limited regulatory environment for the municipal securities market at the federal level in response to the growth of the market, market abuses, and the increasing participation of retail investors. The 1975 Amendments required firms transacting business in municipal securities to register with the Commission as broker-dealers, required banks dealing municipal securities to register as municipal securities dealers, and gave the Commission rulemaking and enforcement authority over such broker-dealers and municipal securities dealers.  The 1975 Amendments also created the Municipal Securities Rulemaking Board (“MSRB”) and granted it authority to promulgate rules governing the sales of municipal securities by broker-dealers and municipal securities dealers.

9 The Commission has attempted to regulate the municipal securities market through Exchange Act Rule 15c2-12, Commission interpretations, enforcement of the antifraud provisions of the federal securities laws, and Commission oversight of the MSRB.

10 Supra, note 6.

11 Supra, note 7.

12 The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) did not change these provisions, but required a study and review by the U.S. Comptroller General of municipal securities disclosure, possible recommendations for municipal issuer disclosure requirements and the advisability of the repeal or retention of the Tower Amendment.  In addition, the Dodd-Frank Act contained other provisions that affected the municipal securities market.  Among other things, it amended Section 15B of the Exchange Act to require the registration of municipal advisors with the Commission and provide for their regulation by the MSRB.  Additionally, the Dodd-Frank Act expanded the MSRB’s authority by explicitly requiring it to protect municipal entities and obligated persons.

13 Supra, Note 6.

14 In 2012, the Commission brought four enforcement actions related to misconduct involving the corporate bond market, as opposed to 17 enforcement actions related to misconduct in the municipal securities market.  See, “SEC’s Enforcement Program Continues to Show Strong Results in Safeguarding Investors and Markets,” available at Among those charged in recent SEC municipal securities actions were:

Goldman Sachs for violations of various municipal securities rules resulting from undisclosed “in-kind” non-cash contributions that one its investment bankers made to a Massachusetts gubernatorial candidate.  See, “SEC Charges Goldman Sachs and Former Vice President in Pay-to-Play Probe Involving Contributions to Former Massachusetts State Treasurer” (September 27, 2012), available at

The former mayor and city treasurer of Detroit in a pay-to-play scheme involving investments of the city’s pension funds.  See, “SEC Charges Former Detroit Officials and Investment Adviser to City Pension Funds In Influence Peddling Scheme” (May 9, 2012), available at

The State of Illinois for misleading municipal bond investors about the state’s approach to funding its pension obligations.  See, “SEC Charges Illinois for Misleading Pension Disclosure” (March 11, 2013), available at

15 See, “The Market Structure Must Work for the American Public – Remarks at Market Structure Roundtable by Commissioner Luis A. Aguilar” (June 2, 2010), available at

16 See, Scott E. Page, “The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools and Societies” (Princeton, NJ: Princeton University Press, 2007) and James A. Fanto, Lawrence M. Solan, and John M. Darley, “Justifying Board Diversity,” 89 N.C. L. Rev. 901, 930-34 (2011). 

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