Participants in the municipal securities market should take particular interest in the appointment of Elisse B. Walter as chair of the SEC. Her close association with regulation of the municipal securities market makes it likely that actions directed at the market will be a high priority for the agency.


Ms. Walter was installed as chair on December 14, 2012, pursuant to presidential appointment. She has been a commissioner since 2008 and most notably led the two-year examination of the municipal securities market that resulted in the July 31, 2012 publication of a comprehensive “Report on the Municipal Securities Market” (Report).

The SEC’s examination of the municipal securities market was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Report focused on two primary areas of concern: disclosure practices and overall market structure. The Report also included recommendations for best practices and other initiatives to improve the security and stability of the municipal securities market.

Market participants should watch closely the actions of the SEC and may anticipate agency actions that are directed at the quality of disclosure or the practices of the municipal securities market.

In light of Ms. Walter’s appointment, a review of the Report’s recommendations is timely.

Important Aspects of the Report

As already mentioned, the Report focused on disclosure practices and overall market structure. Several of the Report’s recommendations would require authorization from the U.S. Congress; others could be implemented by agency action.

The Report regarded the limited statutory regime for municipal securities regulation as a limitation on the SEC’s investor protection efforts. The Report proposed legislative changes to improve disclosures to investors, including the following:

  • Authorization of the SEC to set baseline disclosure standards and require municipal securities issuers to provide audited financial statements.
  • Authorization of the SEC to establish the form and content of financial statements for municipal securities issuers and to designate a private-sector body to set standards for generally accepted accounting principles for federal securities law purposes.
  • Authorization of the IRS to share information with the SEC obtained from returns, audits, and examinations related to municipal securities offerings, particularly in instances of suspected securities fraud.
  • Provision of a mechanism, through trustees or other entities, to enforce compliance with continuing disclosure undertakings and other obligations of municipal securities issuers to protect municipal securities investors.
  • Elimination of exemptions under the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act) for conduit borrowers that are not municipal entities. The Report did not, however, recommend elimination of the exemptions available to nonprofit entities under Section 3(a)(4) of the Securities Act.

The Report also discussed possible actions the SEC could take under existing authority (that is, without further congressional action). Those actions included updating interpretive guidance and working with the MSRB to strengthen the MSRB rules. Most important, they included multiple possible amendments to Rule 15c2-12, such as:

  • Mandating more specific types of disclosure, including disclosures about the issuance of new debt and disclosures about risks of the municipal securities.
  • Providing a method to address noncompliance with regard to continuing disclosure undertakings.
  • Improving the accessibility of disclosure, including the use of summary official statements and increased use of Web sites.

The Report also noted that voluntary industry initiatives would help improve disclosure — not just the content of disclosure by industry sector but also including issuer practices.

Focus on Conduit Borrowers

The Report’s focus on conduit borrowers is particularly notable. Conduit borrowers (which may include for-profit companies or nonprofit entities) access the market through municipal securities issuers. In such cases, the companies often benefit from the exemption of municipal securities under Section 3(a)(2) of the Securities Act from the requirement that a securities offering be registered with the SEC and the requirement for periodic reporting to the SEC.

The Report noted that conduit borrower bankruptcies or defaults have left investors either empty-handed or receiving pennies on the dollar. This prompted the SEC to repeat its recommendation — which has been made since at least the SEC’s 1994 statement regarding disclosure obligations of municipal securities issuers and others (SEC Release No. 33,741) — that conduit borrowers should comply with the SEC’s disclosure rules for public companies.

Most notably, as it relates to conduit borrowers, the Report made the following recommendations:

  • Amend the municipal securities exemptions in the Securities Act and Exchange Act to eliminate the availability of such exemptions to conduit borrowers that are not municipal entities, without differentiation based on the size of the financing due to the continuing availability of other exemptions, including those available for small businesses, private offerings, and nonprofit entities that take into account different types of offerings and issuers. The Report did not, however, recommend elimination of the exemptions available to nonprofit entities under Section 3(a)(4) of the Securities Act.
  • Require companies and other entities that use municipal securities to finance their projects to comply with registration and disclosure provisions of the federal securities laws — the same registration and disclosure standards that apply to corporate borrowers issuing securities directly (that is, not using municipal securities issuers as conduits).

Recent Municipal Securities Market Measures

Any initiative by the SEC would build on a recent, and perhaps accelerating, trend of heightened scrutiny of the municipal securities market and increased disclosure requirements. Here are selected milestones concerning market transparency and disclosure.

  • 2008. The MSRB launched its Electronic Municipal Marketplace Access (EMMA) system. EMMA is an Internet-based system that provides public access to offering documents, secondary market disclosure, and real-time trade price data for the municipal securities market. Its creation marks the first time this type of information is available from a single source, free of charge. The EMMA system functionally replaced the fee-based services of SEC-designated nationally recognized municipal securities information repositories.
  • 2010. The SEC amended Rule 15c2-12 to add events to the required event notices, making the first significant overhaul of the Rule since it was amended in 1994 to require secondary market disclosure undertakings.
  • 2010. The Dodd-Frank Act expanded the MSRB’s mission to include the protection of municipal securities issuers and obligated persons and changed the board’s composition so that public members have a majority of seats. It also granted the MSRB rulemaking authority over municipal advisors. (The Report is the product of Dodd-Frank requirements.)
  • July 2012. The Government Accountability Office issued a report critical of the timeliness of continuing disclosure information and lack of enforcement mechanisms. Soon thereafter, the SEC released the Report, which examined the municipal securities industry, current disclosure practices, and composition of the regulation of the industry and made broad recommendations.
  • August 2012. The MSRB expanded the obligations of underwriters to state and local government issuers. The MSRB issued an interpretive notice to its Rule G-17 on fair dealing detailing specific disclosures to be made by underwriters for the benefit of municipal securities issuers.


All these developments should be considered in the context of the recent global financial crisis affecting the financial institutions and the economic recession, both of which have predictably resulted in political attention to the transparency and adequacy of disclosure in the municipal market place, which may lead to more substantial regulatory and statutory protection for investors and consumers beyond those described in this Alert.

Market participants should watch closely the actions of the SEC and should anticipate a continuation of agency efforts directed at the quality of disclosure and regulatory scrutiny of the municipal securities market.

Should you be interested in reviewing a copy of the Report, it currently is available at the SEC’s Web site: