SEC Commissioner Elisse B. Walter delivered a speech addressing the importance of municipal bond disclosure to investor protection and the Commission’s continuous concern of inadequate disclosure. Walter highlights the underlying sources of the issue. For instance, existing law does not allow the SEC to set baseline disclosure standards for issuers of municipal bonds or require that municipalities make fundamental information, such as audited financial statements, available to investors. 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. Commissioner Walter argues that this “second-class” status treatment of municipal investors by the SEC must change.
Commissioner Walter goes further to argue that enforcement alone isn’t enough for the following reasons: (i) enforcement cases often happen after violations are committed and, by then, it’s too late to make investors whole; (ii) getting the answer wrong puts one in the nuclear zone (e.g., getting pension disclosure wrong can lead to antifraud charges); and (iii) antifraud provisions are broader than disclosure standards and may not provide ideal guidance for avoiding the next disclosure problem. Walter also praises the ways in which Chairman Mary Schapiro has adopted amendments to enhance investor protection. In 2010, she announced an agency-wide effort to examine the municipal securities market and tasked Commissioner Walter with leading the effort. These efforts culminated in the SEC Report on municipal securities (linked below), which provides extensive information by municipal market participants and outlines Commission recommendations for addressing their concerns.
In general, their concerns include market structure and disclosure practices. Commissioner Walter focuses on the issue of disclosure practices in her speech and begins to lay out various recommendations (mostly from the SEC Report) to enhance disclosure. Some of these recommendations include: (i) granting the SEC authority to set baseline disclosure standards; and (ii) requiring municipal issuers to have audited financial statements, as appropriate. The goal is to move forward promptly so that the Commission will be in a position to consider adoption of final rules on municipal advisers sometime in the early part of next year. To that end, Commissioner Walter also outlines a timeline of initiatives which she believes would enhance disclosure in the municipal securities market.
Click here to view speech in full (links externally to SEC website).