Statement at Open Meeting - Adoption of Rules Regarding Municipal Advisor Registration
Commissioner Kara M. Stein
SEC Open Meeting, Washington, D.C.
Sept. 18, 2013
Thank you, Chair White. I would also like to express my sadness concerning what happened at the Navy Yard this week. My thoughts and prayers are with the victims, their families, and everyone who has been touched by this tragedy. I too would like to thank the staff, who have worked tirelessly on this release. Thanks especially to staff in the Office of Municipal Securities and Office of Market Supervision for your thoughtful consideration of the more than 1,000 comment letters received on the interim final temporary rule and of my office’s comments and questions, as well. I also want to acknowledge former Commissioner Elisse Walter and all her hard work on this rule. It is this perseverance and hard work that has led to the final rule that is being considered today.
I think it is important to remember the reason for why we are all here. Municipalities are the lifeblood of many communities. They provide the roads, schools, sewers, firefighters, police officers, and countless other services for millions of Americans. When these critical government structures crumble under financial duress, so does the wellbeing of the communities they serve. In most cases, the finances of these communities are overseen by dedicated public servants. But these public servants are most often not familiar with the financial wizardry of modern financial products.
The increasing size and complexity of products and services offered to the municipalities created significant challenges for those who served them. In recent years, the market has grown from one focused on general obligation bonds with standard features to one characterized by a wide variety of bond structures that use, or are often coupled with, complex derivatives. Municipalities turned to municipal advisors to help them sort through the complexity of this growing marketplace, which currently exceeds $3.7 trillion in principal. Municipal advisors are now involved in transactions representing more than seventy percent of the total amount of municipal debt issued, a number that has been rising steadily and that I expect to continue to rise as the market continues to evolve. Municipal advisors also play a critical role in advising municipalities on the investment of proceeds from municipal securities offerings.
Our dedicated public servants were relying on municipal advisors whose advisory activities generally did not require them to register with the Commission, or any other federal, state, or self-regulatory entity. And a lack of meaningful regulation over these advisors created confusion, and in some instances, horrific abuses. Sadly, the shortcomings of this hands-off regulatory regime became glaringly apparent during the last several years as we learned about numerous examples of bad behavior, including self-dealing and excessive fees. In particular, there were several instances during the financial crisis where municipalities, ranging from Jefferson County, Alabama, as Commissioner Aguilar was mentioning in his remarks, to the Bethlehem School District in Pennsylvania, suffered tremendous losses from complex derivatives products that were marketed by largely unregulated financial intermediaries.
I am pleased that the rules that we are considering today will bring much-needed oversight to this market. These rules will allow the Commission to better oversee municipal advisors and their activities. Under these rules, municipal entities and investors will have publicly-available information to aid them in selecting and doing business with municipal advisors. These rules are designed to mitigate many of the abuses by municipal advisors, including undisclosed conflicts of interest, advice rendered by advisors without adequate training or qualifications, and failures to place the duty of loyalty to a client ahead of their own interests.
By establishing basic ground rules for municipal advisors, we are establishing a baseline of critical protections for our municipalities, and the people they serve. I am also pleased with the rules’ thoughtful approach in determining the contours of the exclusions from registration. This approach appropriately uses activity-based, rather than status-based, exclusions that are clear, administrable, and tailored in a way that is consistent with the purposes of the statute in improving protection of municipal issuers.
But while I am pleased with most aspects of the rules that we are considering today, I am disappointed that they do not include self-certification requirements. As proposed, an authorized person of the municipal advisor would have been required to certify that the municipal advisor, and every natural person associated with it, met certain standards of training and competence. The proposed rules also contained a certification that the municipal advisor had conducted a review of its business and had determined that it could carry out its proposed line of business, that it could comply with all of its regulatory obligations, and that it had met those obligations in the past year (or shorter period in the case of an initial application).
Self-certifications have proven to be extremely effective tools to enhance accountability and improve the quality of assessments. While self-certifications have been made famous by Sarbanes-Oxley, they have been, can be, and should be applied in others areas. Broker-dealers are required to certify annually that they have in place processes to establish, maintain, review, test, and modify written compliance policies and written supervisory procedures reasonably designed to achieve compliance with applicable laws. I strongly believe that having an executive sign a certification leads to a more rigorous internal assessment of a firm’s business and regulatory capabilities, which in turn strengthens its compliance program, policies, and culture.
In a world where we are always seeking to do more with less, the Commission should be looking for ways to incentivize firms to leverage their internal resources to strengthen regulatory compliance. Further, I note that only one – yes, one – out of over a thousand comments advocated for removing the self-certification requirements from the final rules. Simply put, I believe any costs related to self-certification are outweighed by the public interest in being assured that registered firms are able to carry out their proposed lines of business and comply with the law. I am disappointed that it is not part of the rule before us today, but that is not sufficient grounds for me to withdraw my support from this essential rule.
For too long, municipalities were left to fend for themselves. Today, we are taking a critical step towards protecting them, and the communities they serve. I thank the staff again for their extremely hard work. And I thank my fellow commissioners for working with me as I got up to speed on this lengthy rule. I look forward to approving this rule and I have no questions.