SEC Chair Clayton Speaks on Municipal Securities Disclosure

Good afternoon everyone. Thank you to the Office of Municipal Securities for organizing this conference.  And thank you to all the panelists for taking time to join us today.[1]

State of the Municipal Securities Market

Since December 2018, when the Office of Municipal Securities last held a conference on disclosure for municipal securities market, there have been several notable changes in the municipal securities market.[2]

• New municipal issuance for 2019 was over $450 billion.  Notably, taxable issuance increased to over $70 billion in 2019, largely in the second half of the year.
• Retail ownership of municipal securities, including direct ownership and through managed products, has increased approximately 2.6%, with $185.2 billion in retail accounts.
• In 2019, there was a marked increase in municipal inflows into managed products.  Most of the inflows were actively managed funds, but muni ETFs also experience significant inflows.
• And of course, the municipal securities market, like other areas of our fixed income markets, has been impacted by the COVID-19 pandemic.  In March, outflows from these same managed products amounted to over $44 billion, and the par amount of new bond sales was less than $20 billion, less than half of the February total and approximately 30% less than March of 2019.  In April, the outflows for managed products slowed and began to turn positive in the month of May while new municipal issuances for have also increased, but neither fund flows nor new offerings have returned to the levels of activity earlier this year or for these same months in 2019.

As an alternative to the primary market, many municipal issuers facing decreases or delays in collecting revenues and increases in unbudgeted costs, have turned to private placements, loans and lines of credit with banks as a source of liquidity.[3]  In light of market conditions and to facilitate timely and efficient access by smaller municipal issuers to capital, the Commission issued today an order providing temporary conditional relief to municipal advisors from the potential application of broker-dealer registration requirements in connection with certain direct placement of municipal securities until December 31, 2020.[4]  The relief permits municipal advisors to engage in certain solicitations on behalf of municipal issuer clients with banks, their wholly-owned subsidiaries that are engaged in commercial lending and financing activities, and credit unions.  A key purpose of the relief is to aid smaller municipal issuers and, accordingly, the relief is only available in connection with a direct placement in the aggregate principal amount of $20 million or less.  In addition, the order contains important conditions designed to protect against retail investors having exposure to this market.

Evolution of the Disclosure Dialogue

In light of these market dynamics, the theme of today’s conference – the state of secondary market disclosure practices – is particularly relevant.  Robust and timely issuer disclosure is critical to the orderly functioning of all capital markets, including the municipal securities market. In times of uncertainty, it takes on added significance.

In early May, I issued a joint statement with Rebecca [Olsen, Director of the Office of Municipal Securities] on the effects of COVID-19 on the financial status of state and local governments and other issuers in the municipal securities market and the importance of providing investors current financial and other disclosures.[5]  This statement recognized the effects and uncertainties created by COVID-19 and highlighted the importance of municipal issuers providing both current financial and operating status information in times of uncertainty, as well to the extent practicable forward looking information.  It noted that historic financial information in the form of annual information filings or similar disclosure may not enable investors to make informed assessments of a municipal issuers current and expected future financial condition.  At the same time, it recognized the challenges associated with providing voluntary and non-routine disclosures.  I hope our statement has helped municipal issuers, and I commend the many municipal issuers who have already made updated, COVID-19-related disclosures.  The Municipal Securities Rulemaking Board has been tracking COVID-19 related disclosure in both the primary market and continuing disclosures in the secondary market since March 2020, and has seen increases each week in the number of these disclosures.[6]

The importance of disclosure was also recently highlighted by the Office of Municipal Securities in a Staff Legal Bulletin[7] summarizing the staff’s views on the application of the antifraud provisions to statements made by municipal issuers in the secondary market.  As the Commission observed in 1994, as a practical matter municipal issuers do not have the option of remaining silent.  That remains true today.  Municipalities regularly engage with the public in a variety of contexts and therefore must be mindful of antifraud provisions.  Because issuers do not (and for various reasons cannot) remain silent, it is important as noted in the staff bulletin for issuers to have policies and procedures in place that encourage timely disclosures so that investors do not rely on stale information.  I encourage issuers to discuss these issues with the Office of Municipal Securities.

In addition, since the date of our last municipal securities conference, there has been engagement on the topic of disclosure from the MSRB, industry groups, investors, and notably the Commission’s Fixed Income Market Structure Advisory Committee (FIMSAC).  You have all made valuable contributions to the dialogue and I encourage you to keep making them.  Today, I’d like to highlight two topics addressed at February’s FIMSAC meeting.[8]

First, the FIMSAC made a recommendation that the Commission explore ways through which it could make disclosure deadlines for annual financial information and audited financial statements more certain.  At the last municipal securities disclosure conference, I noted my view that providing greater clarity regarding existing municipal issuer financial disclosure practices will provide investors and the market with better access to valuable information.[9] One aspect of a municipal issuer’s existing disclosure practices that could benefit from greater clarity is whether or not the issuer is in compliance with its contractual continuing disclosure obligations. Notably, I am not alone in this belief as commenters raised it during the notice and comment process for the recent amendments to the MSRB’s EMMA Facility.  This benchmark can be difficult to assess because the lack of certainty in some instances when annual financial filings are due. For example, when the issuer’s annual filing deadline is set by reference to a number of days elapsed after the end of the issuer’s fiscal year, or if the deadline is conditioned on the occurrence of some variable (such as “two weeks after the council approves the filing”).  The Office of Municipal Securities is currently considering the FIMSAC recommendation, and I look forward to learning more about market participants’ views regarding disclosure deadlines.

Second, the FIMSAC also recommended that the Commission seek public comment about the concerns raised by market participants and the potential need for the SEC to establish a disclosure framework including timeframe obligations for issuers.  I agree that your input and participation is essential to Commission action in this area.  Today’s conference is one of many potential avenues for the staff and the Commission to listen and learn from market participants about this important topic.  I would like to commend the staff in OMS for its general commitment to engagement with market participants.

Thank you again for your participation in today’s conference and I look forward to hearing the panelists discuss these developments and other important topics.