Statement Summary
In a recent speech, the SEC’s Director of the Office of Municipal Securities addressed the need for clarity in the terminology used by municipal entities and their advisors, emphasizing the importance of using the term “municipal advisor” instead of “financial advisor” to ensure compliance with regulatory standards. He highlighted the necessity for municipal entities to hire registered municipal advisors and to clearly outline these roles in RFPs and offering documents. The Director also discussed the significance of continuing disclosure undertakings under Rule 15c2-12 and the ambiguity surrounding them. He encouraged voluntary disclosures beyond contractual obligations to enhance transparency and market efficiency, suggesting that issuing regular updates could benefit both issuers and investors. The speech underscored the role of sound disclosure practices in maintaining investor confidence in the municipal securities market.
Original Statement
Good afternoon. Thank you to the Government Finance Officers Association (“GFOA”) for inviting me to speak with you today. In my role as the Securities and Exchange Commission’s (“Commission” or “SEC”) Director of the Office of Municipal Securities (“Office of Municipal Securities” or “OMS”), I get a front row seat to see how government finance professionals strive to advance the continued integrity of the municipal securities market. However, I also get a front row seat to some concerning behaviors that may impact the investor confidence and transparency of the municipal securities market. As is customary, I must remind you that this speech is provided in my official capacity as the Commission’s Director of the Office of Municipal Securities but does not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff.
What’s in a Title?
Before I delve into disclosure practices, I would like to start by offering my views on another area of concern to which OMS is paying careful attention. It’s been fifteen years since Congress created a new class of regulated person required to register with the Commission: municipal advisors. But when I speak with market participants or pick up an official statement or visit an issuer’s website, I am regularly confronted with a title that imprecisely reflects the nature of the relationship between municipal entities and/or obligated persons and their advisors: financial advisor.
While some of you may view using the terms “financial advisor” and “municipal advisor” to be interchangeable when discussing hiring a professional to negotiate terms of a transaction or verify pricing as just a matter of a title, Congress expressly defined those persons who engage in municipal advisory activities as “municipal advisors”.
I’m going to start with why I think it’s helpful to use regulatory terms. Although not required, using regulatory terms such as “municipal advisor” in solicitations and offering documents is helpful because it clearly indicates to investors that those professionals are subject to the rules and regulations designed to protect investors and municipal entities and obligated persons. Additionally, using defined regulatory terms in these documents may be helpful to municipal entities and obligated persons in avoiding including confusing or ambiguous statements in disclosures to investors.
Observations on Amendments to Continuing Disclosure Undertakings
Now turning to disclosure practices. When the Commission proposed amendments to Rule 15c2-12 of the Securities Exchange Act of 1934 in 1994 prohibiting underwriters, subject to certain exemptions, from purchasing or selling municipal securities covered by the Rule in a primary offering, unless the underwriter had reasonably determined that the issuer (or obligated person) had undertaken in a written agreement or contract (“continuing disclosure undertaking”) to provide specified annual information and event notices, practitioners expressed concern that the amendments were not sufficiently flexible to address changing conditions to financial and pertinent operating information.
The Commission explained in the 1994 Amendments Adopting Release that Rule 15c2-12, as amended, requires that continuing disclosure undertakings specify only the general type of information to be provided and that undertakings should be drafted with sufficient flexibility to accommodate for subsequent developments that may require adjustments in the financial information and operating data contractually agreed upon in the undertaking.
Since the 1994 amendments promoted flexibility in drafting continuing disclosure undertakings, staff has heard that practitioners have discovered ambiguities and inconsistencies in their continuing disclosure undertakings that have resulted in overlapping, inconsistent, and outdated information in required disclosures. Consequently, practitioners continue to struggle with questions about amending continuing disclosure undertakings and have asked the staff for guidance on this issue.
The Importance of Voluntary Disclosure in the Municipal Securities Market
Sound, timely, and accurate disclosures of the financial condition and operating status of issuers and obligated persons promotes the continued integrity of the municipal securities market. As we all know, Rule 15c2-12 requires that continuing disclosure undertakings set forth certain enumerated requirements. Rule 15c2-12 does not generally impose an obligation to provide ongoing information beyond the contractual continuing disclosure obligations. I am of the view, however, that voluntary disclosures — providing information beyond contractual continuing disclosure obligations — by issuers and obligated persons can provide market participants with updated financial and other disclosures regarding the effects of evolving economic conditions.
Issuer organizations and other market participants have noted that providing voluntary interim disclosure can serve the interests of municipal issuers and have developed voluntary disclosure best practices designed to improve the quality and quantity of voluntary disclosure in the secondary market. I am of the view that if issuers and obligated persons provide voluntary disclosures of their financial condition and operating status on a more frequent basis, the additional information could potentially reduce information asymmetries and help investors and other market participants identify early warning signs of an issuer’s or obligated person’s deteriorating financial condition sooner.
It’s always a pleasure to speak with members of the GFOA. Thank you again for the invitation to discuss these important issues with you today.
