Remarks of Michael G. Bartolotta, Chair Municipal Securities Rulemaking Board at the Education Finance Council Mid-Year Membership Meeting Washington, DC July 14, 2011
Good morning, my name is Michael Bartolotta and I am Chair of the Municipal Securities Rulemaking Board the MSRB. I am honored to be here today at the Education Finance Council s Mid- Year Membership Meeting. We have developed a close working relationship with the education finance community and appreciate EFC staff s participation at our most recent MSRB Roundtable. I know that I am speaking to a diverse and influential group of people that touch the education finance market. Since 2000, nearly 60 student loan authorities and other municipal issuers have brought more than $120 billion of municipal securities to the market with the purpose of providing student loans. These loans make college affordable and possible for millions of students, and exemplify the truly public purpose of our market. The stability and efficiency of the student loan capital market is of great interest to the MSRB. And as I will tell you more about, we believe our recently expanded jurisdiction will help further protect this critical segment of the municipal market. For the past two years and never more so than today the municipal market has been the focus of an unprecedented level of attention. At the MSRB, we believe this recognition of our market s importance is long overdue. Credit quality, public pension funding, infrastructure finance, concerns about disclosure
and the financial condition of state and local governments are all issues that have the potential for affecting fundamental aspects our lives. In recent months, discussions in Washington about potentially eliminating the tax-exempt status of municipal bonds are yet another powerful force buffeting the municipal market. One fundamental outgrowth of the heightened importance of the municipal market was the signing one year ago of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This piece of legislation represented the most significant change affecting the municipal market since 1986. We are just days away from the first anniversary of the bill s signing and much attention is being paid to how the Dodd-Frank Act is being implemented. Two days ago, the MSRB testified before Congress on the progress we have made in protecting the municipal market. As many of you know, the Dodd-Frank Act expanded the mission to include the protection not only of investors but also of municipal securities issuers, public pension plans and those whose credit stands behind municipal bonds. To our knowledge, this is the first time Congress has enacted a law to protect issuers of securities. What s more, this new paradigm has transformed the MSRB into a broad-based market regulator whose actions cascade across all market participants.
As a self regulator, the MSRB has always sought input from the market to create an environment of efficiency and fairness. Never has that input been more important as we develop the foundation for protecting municipal entities including state student loan authorities and other issuers of student loans. The MSRB does not regulate the issuers of municipal securities, and is not seeking to do so. Our goal is to ensure that the municipal market operates fairly and efficiently. By doing so, issuers have the ability to raise capital at reasonable costs and are treated fairly by the professionals they hire to advise and assist them. As many of you know, the MSRB has regulated dealers since 1975 and last year, as part of the Dodd-Frank Act, was granted regulatory authority over municipal advisors. Many of these advisors were previously unregulated. Now they are subject to standards of conduct being developed by the MSRB and have a federal fiduciary duty toward their municipal clients. We agree with the EFC s concern about the Securities and Exchange Commission s proposed overly broad definition of municipal advisor. The MSRB supports a definition that does not include appointed members of a municipal entity and we have recommended to the SEC that they be excluded from the final definition. But regulation of advisors that perform financial advisory work is essential to preserving the integrity and fairness of the municipal market. We and Congress believe that by
expanding regulatory oversight to municipal advisors, municipal entities, as many of you are, will be protected from behavior and practices that are unfair or worse. The MSRB is working to develop a framework to require municipal advisors to act in the best interests of their client and refrain from self-dealing in order to fulfill their fiduciary duty. Investors too will benefit from this increased oversight, as uniform practices and professional conduct improve efficiency and overall fairness of the municipal market. One area where there is potential for abuse in the relationship between advisor and issuer is in the area of political contributions. A fair municipal market requires that municipal advisory, bond underwriting and related business is awarded on the basis of merit. The MSRB was the first regulator to adopt pay-to-play restrictions for professionals in the financial services industry and underwriters have operated under this regime since 1994. The MSRB has proposed a similar pay to-play rule for municipal advisors that we believe will promote market integrity as well as public confidence in the market and elected officials. Another area for potential conflicts of interest is in the giving of gifts to employees controlling the award of municipal advisory business. To minimize this potential, the MSRB intends to put in place rules for advisors that limit gifts related to their municipal advisory work.
Of course, the MSRB continues to focus on the activities of dealers and their professional obligations to the market. Their obligations toward municipal entities are even more important in light of our expanded mission. The MSRB recently adopted a rule that generally prohibits a dealer that serves as financial advisor to an issuer for a particular issue from switching roles and underwriting the same issue. This is intended to eliminate a conflict of interest that the MSRB has come to believe is too substantial for disclosure and consent to cure. In the coming weeks, the MSRB will file with the SEC the most substantial interpretation of the MSRB s fair dealing rule as it relates to underwriters obligations to municipal entities. The interpretation requires that all representations made by underwriters to issuers of municipal securities in connection with municipal securities underwritings must be truthful and accurate and may not misrepresent or omit material facts. Furthermore, an underwriter of a negotiated issue that recommends a complex municipal securities financing for example, a variable rate demand obligation with a swap) must disclose all material risks and characteristics of the financing, as well as any incentives for the underwriter to recommend the financing and other associated conflicts of interest. The interpretation also addresses the fairness of the price an underwriter pays for an issue, an underwriter s compensation for a new issue and disclosure of conflicts of interest such as third-party payments, certain credit default
swaps, and profit-sharing arrangements with investors that may affect the underwriter s recommendations to the issuer. We believe this comprehensive guidance will be a game-changer in the market and significantly improve the protection of municipal entities when issuing securities. The rules I have mentioned are just a small part of the regulatory backbone that helps support a fair and efficient municipal market. Our rules govern the conduct of the intermediaries in our market, and the information systems we operate support market transparency for all participants. I would now like to turn our attention to market transparency. The MSRB s EMMA website provides all municipal market participants free public access to hundreds of thousands of disclosure documents and trade prices associated with approximately 1.5 million outstanding bonds. Market participants continue to tell us how much they value EMMA. In 2010, EMMA received an average of 19 million page views per month. The MSRB continues to make enhancements to EMMA aimed at improving market transparency in ways that will benefit all participants in the municipal market. Many of you are or were important participants in the auction rate securities and variable rate demand obligation markets. The MSRB began providing
interest rate information on EMMA about ARS and VRDO in 2009, after instability in these markets raised significant disclosure and market transparency concerns. Today EMMA remains the only source of current, market-wide interest rates for variable rate securities. In May 2011, the MSRB enhanced EMMA to provide public access to key ARS auction and VRDO liquidity information. VRDO information on EMMA now includes actual copies of documents detailing liquidity provisions, such as a letter of credit. The MSRB received requests from issuers to provide the ability for issuers to voluntarily post preliminary official statements on EMMA and, of May 2011, the MSRB made this possible. Several issuers have already taken advantage of this new EMMA feature and we expect its use to increase over time. Requiring timely disclosure by the firms and individuals that we regulate and promoting good disclosure on the part of issuers has and continues to be an important objective for the MSRB. We operate EMMA in part as a tool for issuers to communicate important information about their bonds to investors and to the market. Some continuing disclosure information is required from issuers under SEC Rule 15c2-12. The MSRB has added the ability for issuers to submit numerous voluntary disclosures. Most recently, the MSRB enhanced EMMA to allow issuers to submit information about the timing (120 or 150 days after the end of
the fiscal year) and accounting standard used to prepare annual financials. The MSRB hopes issuers use EMMA as a platform to communicate important information about themselves to investors. However, it is the individual issuers that decide how to use EMMA and whether or not their continuing disclosure practices will meet or exceed what is minimally required. As EMMA provides a centralized location for these disclosures, investors, underwriters and others interested in the disclosure practices of issuers can easily compare the amount of available information. The amount and quality of an issuer s continuing disclosure can affect its borrowing cost. The MSRB will continue to improve EMMA. This fall, EMMA will display credit ratings from one or more of the Nationally Recognized Statistical Rating Organizations. These ratings will be available on the EMMA website, for free, and updated in realtime. As many of you know, the Dodd-Frank Act requires the Securities and Exchange Commission to promulgate rules regarding the use of representations and warranties in the market for asset-backed securities. Examples of municipal securities that could fall under new Exchange Act rule are student loan bonds, housing and mortgage bonds, bond-bank issuances and revolving fund bonds.
New disclosure requirements for municipal ABS, if triggered, will require securitizers to disclose three years of repurchase or replacement history in offering documents and also provide quarterly disclosures of this information. In the case of municipal securitizers, these disclosures may be submitted to EMMA beginning in February 2015. The MSRB will continue to update market participants as this 2015 date approaches. Also as part of our transparency initiatives, the MSRB is undertaking a study of the municipal market, including ascertaining whether market pricing and liquidity might be improved with higher levels of pre-trade price transparency in the secondary market. We plan to review initial results from the study later this year, so please stay tuned. We anticipate that this is the initial phase of a multi part study to fully understand the pricing dynamics in our market. In addition to evaluating pre-trade transparency, I will be asking the Board to consider assessing the effects, if any, of retail order periods and distribution agreements, on the distribution of new issues from the perspective of pricing and syndicate rules. It is crucial that market participants have the facts to evaluate different distribution channels of their securities. The initiatives and challenges I have described today are closely related to the borrowing costs of municipal issuers, to the retirement security of current and former municipal employees,
to the college savings capability of state citizens and to the overall service of the public interest. The MSRB is eager to continue to work with issuers and provide tools and resources that will benefit the market as a whole. The goal of regulation, as I see it, is to achieve the most efficient marketplace possible to increase the likelihood that the investing public and the issuer community realize the best possible outcomes for both large and small investors and issuers. In other words, the MSRB seeks to create the conditions for fair, wellinformed financial decisions by all market participants. The MSRB cannot act as a guarantor against poor decisions by either investors or issuers, or guard against the occurrence of adverse events in the market. However the MSRB does have the ability to set standards of conduct and require disclosures on the part of the financial intermediaries MSRB regulates. We also can and do provide a tremendously valuable electronic disclosure system that is available to all market participants. Where we have the jurisdiction and ability to act, the MSRB has raised the bar on professional conduct by financial professional and advanced market transparency in many significant ways. If there are ways you believe the MSRB could improve its regulatory initiatives, we would like to hear from you. As an organization, the MSRB is dedicated to a thoughtful, thorough rulemaking process that involves significant input from municipal market participants. We recently received comments from the
EFC regarding our municipal advisor rulemaking and will take them into consideration, along with the comments we received from participants across the market. As a self-regulatory organization, we depend on input from issuers, industry members and the public to ensure MSRB rules are timely and appropriate. We believe that this widespread participation in rulemaking makes both the process and the product at the MSRB as balanced as possible and in the best interests of investors and municipal entities. The MSRB remains ever vigilant as challenges to the municipal market expected and unexpected arise. We are listening to your comments and questions, and welcome any feedback you may have. The MSRB will continue to fulfill its mission to protect the municipal market, and we look forward to your participation in our efforts. I appreciate the opportunity to speak to you today and can respond to any questions you might have.