Framework for appropriate disclosure on munis is needed

The following are remarks delivered by Securities and Exchange Commission member Elisse B. Walter on Sept. 21 in San Francisco at the SEC's inaugural hearing on the state of the municipal-securities market. 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, which may include legislation, rulemaking and changes in industry practice. 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 trillion, and more than $470.5 billion of new bonds and notes were issued last year.

BUILD AMERICA BONDS

The Build America Bonds 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. 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. With an estimated 51,000 or more state and local issuers, it is an extremely diverse market. Depending on the type of financing, payments may come from general revenue of the municipal issuer, specific tax receipts, revenue 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% of outstanding municipal securities directly, up to another 34% indirectly through mutual funds and closed-end funds, and retail-size trades account for roughly 81% of trading volume. 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. 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.

INVESTOR RIGHTS

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. I, for one, believe that needs a hard look. Some have suggested looking to the corporate-disclosure scheme as a framework for municipal disclosure ... 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.