Tuesday, October 16, 2018

SEC official urges municipal securities market participants to improve clarity of disclosure

By John Filar Atwood

In her first published address since taking over as the SEC’s Director of the Office of Municipal Securities, Rebecca Olsen urged municipal securities market participants to refine disclosure best practices and explore new areas for guidance. She noted that offering and other disclosure documents often use complex language, and she asked the industry to simplify its disclosure given the high level of retail investor participation in the municipal securities market.

In remarks at the municipal finance leadership conference, Olsen noted that municipal securities are exempt from federal securities registration and reporting requirements that apply to other publicly offered securities. As a result, market participants historically have worked together to develop voluntary disclosure guidelines and best practices.

Existing guidelines and best practices relate to the content and timing of financial statements and financial information, disclosure of pension liabilities, industry and financing specific guidelines, disclosure controls and procedures of a municipal issuer, and methods of providing disclosure, she said. Olsen applauded the willingness of industry groups to voluntarily discuss and generate ways of measuring successful disclosure, but suggested that they continue to strive for high-quality disclosure practices through development and enhancement of best practices guidelines.

In particular, she recommended that voluntary industry initiatives focus on the accessibility and understandability of information. The diversity and complexity of the municipal securities market appear to provide challenges for investors, she said, and they may have trouble understanding lengthy disclosure documents or the terms of complex municipal securities. She reiterated the SEC’s commitment to having companies communicate with investors in clear, easily understandable language.

Retail investors. She underscored the importance of clear disclosure by pointing out the high concentration of municipal securities in the hands of retail investors. The municipal securities market has over $3.853 trillion in principal outstanding, she noted, and at the end of the second quarter of 2018, individuals held, either directly or indirectly through mutual or other funds, over 66 percent of the total market.

Olsen said that in the absence of a statutory scheme for municipal securities registration and reporting, the SEC’s investor protection efforts have been accomplished primarily through regulation of broker-dealers and municipal securities dealers, including through Exchange Act Rule 15c2-12, Commission interpretations, enforcement of the antifraud provisions of the federal securities laws, and Commission oversight of the MSRB.

Commission’s efforts. Although the agency’s authority with respect to the municipal securities market is more limited than that in other markets, Olsen said that the Office of Municipal Securities recognizes that investors in municipal securities are entitled to the same transparency that investors in other markets are afforded. As a result, the Commission’s rules are designed to enhance transparency in the municipal securities market and to protect municipal securities investors. She noted that the SEC recently approved amendments to Rule 15c2-12 that are designed facilitate timely access to important information regarding material financial obligations whose terms could impact an issuer’s liquidity and overall creditworthiness.

The Commission also demonstrates its commitment to protecting municipal securities investors through the efforts of the Public Finance Abuse Unit (PFAU), she said. The PFAU is a specialized enforcement unit that is dedicated to pursuing investigations related to possible misconduct in the municipal securities market and in connection with public pension funds, including investigations relating to potential offering and disclosure fraud.