oversight

Municipal Securities: Options for Improving Continuing Disclosure

Published by the Government Accountability Office on 2012-07-19.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to Congressional Committees




July 2012
             MUNICIPAL
             SECURITIES
             Options for Improving
             Continuing Disclosure




GAO-12-698
                                              July 2012

                                              MUNICIPAL SECURITIES
                                              Options for Improving Continuing Disclosure

Highlights of GAO-12-698, a report to
congressional committees




Why GAO Did This Study                        What GAO Found
Municipal securities are debt                 Market participants indicated that primary market disclosure for municipal
instruments that state and local              securities—official statements—generally provides useful information, but
governments issue to finance diverse          investors and market participants cited a number of limitations to continuing
public projects. As of March 31, 2012,        disclosures. The most frequently cited limitations were timeliness, frequency, and
individual investors held up to 75            completeness. For example, investors and other market participants said that
percent of the total value of municipal       issuers do not always provide all the financial information, event notices, or other
securities outstanding. These                 information they pledged to provide for the lifetime of a security. While GAO's
securities are exempt from certain            analysis of current regulatory requirements for municipal securities disclosure
federal disclosure requirements
                                              found that they largely reflected the seven principles of effective disclosure,
applicable to other securities sold
                                              regulators and market participants said that there are some limitations on the
publicly. Disclosure provided in the
primary market, where these securities
                                              enforceability and efficiency of the regulations. However, the effect of these
are issued, generally consists of official    limitations on individual investors largely is unknown because limited information
statements. Continuing disclosure is          exists about the extent to which individual investors use disclosures to make
information provided in the secondary         investment decisions. Nevertheless, regulators remain concerned about this
market, where these securities are            market, in part due to its size and the participation of individual investors. As
bought and sold after issuance. The           discussed below, the Securities and Exchange Commission (SEC) and Municipal
Dodd-Frank Wall Street Reform and             Securities Rulemaking Board (MSRB) have been taking or plan to take actions to
Consumer Protection Act required              improve disclosure.
GAO to review the information issuers
                                              Experts and market participant groups GAO surveyed suggested options for
of municipal securities must disclose
for the benefit of investors.                 improving disclosure, some of which would require statutory changes while
                                              others could be achieved within the existing regulatory framework. One
This report addresses (1) the extent to       suggested statutory change was the repeal of the Tower Amendment, which
which information currently provided on       some experts believed would allow federal regulators to directly require issuers
municipal securities is useful for            to make disclosures, but SEC and MSRB staff did not agree. The Tower
investors and the extent to which             Amendment prohibits SEC and MSRB from requiring issuers of municipal
existing regulations reflect principles       securities to file certain materials with them. While MSRB and SEC staff said that
for effective disclosure, and (2) options     repealing the Tower Amendment would remove the prohibitions on requiring
for improving the information issuers
                                              issuers to file certain materials with them, they noted that it would have no real
disclose to investors of municipal
                                              effect on what they can require issuers to disclose because municipal issuers are
securities. To conduct this work, GAO
reviewed disclosure rules and
                                              exempt from SEC registration and MSRB does not otherwise have affirmative
compared them with principles for             authority to regulate municipal issuers. Other suggestions from experts and
effective disclosure cited by SEC and         market participant groups requiring statutory changes included mandating
the International Organization of             accounting standards and requiring the submission of financial information at
Securities Commissions, surveyed              intervals more frequent than annually. Experts and market participant groups
selected experts and market                   suggested other options to improve disclosure that could be achieved within the
participants, and interviewed issuers.        existing regulatory framework, including further improving and promoting MSRB's
                                              Electronic Municipal Market Access (EMMA) system, which since July 2009 has
GAO provided a draft of this report to
                                              served as the official central repository for disclosures about municipal securities.
SEC, MSRB, and the Financial
                                              While experts and market participants said that EMMA had greatly improved their
Industry Regulatory Authority (FINRA).
SEC and MSRB provided technical
                                              access to information on municipal securities, many suggested that further
comments, which GAO incorporated,             enhancements to EMMA would increase the usefulness of the system to
as appropriate. FINRA did not provide         investors and issuers. MSRB issued a plan in January 2012 to improve EMMA
comments.                                     and recently has taken steps to enhance EMMA's functionality. Further, SEC
                                              staff indicated their plan to release a staff report in 2012 to include
View GAO-12-698. For more information,        recommendations on measures to improve primary and secondary market
contact A. Nicole Clowers at (202) 512-8678   disclosure practices, market practices, and associated regulation.
or clowersa@gao.gov.

                                                                                       United States Government Accountability Office
Contents


Letter                                                                                      1
               Background                                                                   5
               Investors and Market Participants Cited Limitations of Continuing
                 Disclosures                                                                8
               Options for Improving Disclosure Involve Potential Benefits and
                 Challenges                                                               22
               Agency Comments                                                            41

Appendix I     Objectives, Scope, and Methodology                                         42



Appendix II    Key Federal Disclosure Requirements for Publicly Offered Municipal
               and Corporate Securities                                                   46



Appendix III   Principles of Effective Disclosure Compared with Current Disclosure
               Regulations for Municipal Securities                                       50



Appendix IV    Pension Liability Reporting                                                52



Appendix V     GAO Contact and Staff Acknowledgments                                      55



Tables
               Table 1: Cumulative Average Default Rates for Municipal and
                        Corporate Issuers (in Percentages), as of Year-end 2011           19
               Table 2: Comparison of Key Federal Disclosure Requirements for
                        Publicly Offered Municipal and Corporate Securities, as of
                        June 2012                                                         46
               Table 3: Principles of Effective Disclosure Compared with Current
                        Disclosure Regulations for Municipal Securities                   50




               Page i                                          GAO-12-698 Municipal Securities
Abbreviations

CUSIP             Committee on Uniform Security Identification Procedures
EMMA              Electronic Municipal Markets Access
FASB              Financial Accounting Standards Board
FINRA             Financial Industry Regulatory Authority
GAAP              generally accepted accounting principles
GASB              Governmental Accounting Standards Board
MSRB              Municipal Securities Rulemaking Board
SEC               Securities and Exchange Commission
SRO               self-regulatory organization




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Page ii                                                    GAO-12-698 Municipal Securities
United States Government Accountability Office
Washington, DC 20548




                                   July 19, 2012

                                   The Honorable Tim Johnson
                                   Chairman
                                   The Honorable Richard C. Shelby
                                   Ranking Member
                                   Committee on Banking, Housing, and Urban Affairs
                                   United States Senate

                                   The Honorable Spencer Bachus
                                   Chairman
                                   The Honorable Barney Frank
                                   Ranking Member
                                   Committee on Financial Services
                                   House of Representatives

                                   Municipal securities are debt instruments that state and local
                                   governments issue to finance transportation, housing, hospitals,
                                   education, and other diverse public projects. 1 The value of municipal
                                   securities outstanding was an estimated $3.7 trillion as of March 31,
                                   2012, with individuals (also known as retail investors) holding 50 percent
                                   of the total outstanding directly, such as through purchases from broker-
                                   dealers, and up to another 25 percent indirectly through investment
                                   funds. 2 There are approximately 51,000 state and local government
                                   issuers of municipal securities and the number of separate outstanding
                                   municipal securities is estimated to be more than 1.3 million, according to
                                   information cited by the Securities and Exchange Commission (SEC). 3


                                   1
                                    For the purpose of this report, municipal securities are debt instruments issued by state
                                   and local governments. Municipal securities also include certain types of nondebt
                                   instruments (known as municipal fund securities) that include interests in 529 college
                                   savings plans. Practices with respect to municipal fund securities are beyond the scope of
                                   this report.
                                   2
                                    Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the
                                   United States, June 7, 2012. Municipal securities are bought, sold, and underwritten by
                                   securities firms registered as brokers or dealers and by banks registered as municipal
                                   securities dealers (sometimes referred to as bank dealers). For purposes of this report, we
                                   collectively refer to securities firms and bank dealers that purchase, sell, and underwrite
                                   municipal securities as broker-dealers.
                                   3
                                    In comparison, SEC reported in 2006 that there were 9,428 public companies in the
                                   United States with requirements to report information with SEC.




                                   Page 1                                                    GAO-12-698 Municipal Securities
State and local governments account for 80 percent of the total
outstanding. 4 Of the remaining 20 percent, corporate conduit borrowers
(public and privately held companies) account for approximately 13
percent and nonprofit conduit borrowers (such as schools, health care
providers, and nonprofit housing developers) account for approximately 7
percent. 5

Concerns have been raised about whether investors—particularly retail
investors—have access to enough information about municipal securities
to make informed investment decisions. Some professional analysts also
believe investors may be at heightened risk as states, municipalities, and
other entities that issue debt struggle with the aftermath of the recent
financial crisis and growing pension obligations. While the federal
securities laws generally require certain disclosure in connection with the
issuance of securities, Congress exempted municipal securities from the
registration and periodic reporting provisions of the federal securities
laws, but not the antifraud provisions. Furthermore, SEC and the
Municipal Securities Rulemaking Board (MSRB) are not authorized to
require issuers of municipal securities to file certain materials. 6 The
specific prohibitions differ for each regulator, pursuant to provisions of the
Securities Acts Amendments of 1975, generally known as the Tower
Amendment. 7

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) directs us to conduct a study and review of the disclosure


4
 Flow of Funds Accounts, June 7, 2012.
5
 Corporate and some nonprofit borrowers access the municipal market through
governmental issuers that act as conduits to the market.
6
 SEC is the primary overseer and regulator of U.S. securities markets and administrator of
federal securities laws. MSRB is a self-regulatory organization (SRO) created in 1975 with
the mission to protect investors, state and local government issuers, other municipal
entities, and the public interest by promoting a fair and efficient municipal securities
market.
7
 In the Securities Acts Amendments of 1975, Congress prohibited SEC and MSRB from
requiring any issuer of municipal securities, directly or indirectly, to file with them prior to
the sale of such securities any application, report, or document in connection with the
issuance, sale, or distribution of the securities. Congress further prohibited MSRB from
requiring any issuer of municipal securities, directly or indirectly, to provide them or a
purchaser or a prospective purchaser of such securities any application, report, document,
or information with respect to the issuer. Pub. L. No. 94-29, § 15B(d), 89 Stat. 97 (1975)
(codified at 15 U.S.C. § 78o-4(d)).




Page 2                                                        GAO-12-698 Municipal Securities
required to be made by issuers of municipal securities. 8 This report
addresses (1) the extent to which information currently provided on
municipal securities is useful and the extent to which existing regulation
reflects principles for effective disclosure, and (2) options for improving
the information issuers disclose to investors of municipal securities, and
the related benefits and challenges of these options.

To describe the extent to which information is useful for investors and the
extent to which existing regulations reflect principles for effective
disclosure, we reviewed SEC and MSRB rules, SEC and MSRB staff
reports for improving disclosures, and comment letters submitted to SEC
regarding its study of the municipal securities market. We reviewed
disclosure information in the Electronic Municipal Market Access (EMMA)
system, the official central repository for disclosures about municipal
securities. We compared disclosure regulations with principles for
effective disclosure from the International Organization of Securities
Commissions (Principles for Ongoing Disclosure and Material
Development Reporting by Listed Entities) and SEC’s Plain English
Handbook. We reviewed independent and academic studies on the
usefulness of disclosure information, and data on municipal securities
defaults from independent research firms and rating agencies to
understand the risks to investors of municipal securities. We worked
through the American Association of Individual Investors to identify and
interview 12 retail investors with diverse investment experience with
municipal securities. For more perspectives of individual investors, we
reviewed transcripts of SEC hearings on the state of the municipal
securities market held in 2010 and 2011 and reviewed a study conducted
for SEC on the usefulness of SEC-mandated disclosure documents. We
also conducted a case study of 14 issuances and made observations
about EMMA and the usefulness of the disclosures from the individual
investors’ points of view. We also interviewed institutional investors
(including representatives of eight investment companies), professional
analysts, an independent research firm, and groups representing market
participants, including broker-dealers, bond lawyers, and municipal
advisors. We interviewed staff of federal and state regulators, self-



8
 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203,
§976, 124 Stat. 1376, 1924 (2010). The act also requires us to examine the municipal
securities market, a requirement that we completed in a separate report. See GAO,
Municipal Securities: Overview of Market Structure, Pricing, and Regulation, GAO-12-265
(Washington, D.C.: Jan. 17, 2012).




Page 3                                                  GAO-12-698 Municipal Securities
regulatory organizations (SRO), and associations, including SEC, MSRB,
the Financial Industry Regulatory Authority (FINRA), and the North
American Securities Administrators Association. 9

To identify options for improving the information issuers disclose to
investors, we reviewed securities laws, regulations, and guidance. We
also reviewed SEC and FINRA examination manuals for SEC Rule 15c2-
12, which establishes requirements for the underwriters of municipal
securities, and reviewed data on examinations that found violations of the
rule. 10 Furthermore, we surveyed experts and groups representing
issuers and other market participants, such as municipal advisors, broker-
dealers, and professional analysts. We used a nonprobability sampling
method to identify and select experts by obtaining referrals from other
market participants, experts, and regulators. Although our results are not
generalizable, our survey covered a diverse group of experts and market
participant groups with broad and differing perspectives. We administered
the survey to 26 experts and 29 market participant groups and received
responses from 21 experts and 21 groups. To identify the benefits and
challenges of these options, we interviewed issuers in three groups
representing (1) large and frequent issuers, (2) small and infrequent
issuers, and (3) conduit issuers. To provide information about options for
improving disclosure information and related benefits and challenges, we
also drew on the interviews we conducted with investors, regulators, and
market participants.

We conducted this performance audit from June 2011 to July 2012 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives. Appendix I provides a more
detailed description of our scope and methodology.




9
 FINRA is an SRO that regulates 98 percent of the broker-dealers that trade municipal
securities. NASAA is a membership organization representing state securities agencies.
10
    For the text of SEC Rule 15c2-12, see 17 C.F.R. § 240.15c2-12.




Page 4                                                    GAO-12-698 Municipal Securities
             SEC and MSRB are the primary entities that have authority at the federal
Background   level with respect to disclosure to investors in municipal securities. In the
             context of municipal securities, SEC interprets and enforces the federal
             securities laws, including by adopting rules and enforcing antifraud
             provisions; maintaining regimes for the registration, compliance,
             inspection, and education of broker-dealers, investment advisers, and
             municipal advisors; and providing general educational materials for
             investors about investing in municipal securities. 11 SEC also oversees
             MSRB and FINRA. MSRB maintains an online repository of information
             (that is, EMMA) to promote market transparency, for example, by
             providing access to primary market and continuing disclosures and
             information about trade pricing. 12 MSRB also provides educational
             materials to investors and issuers of municipal securities. MSRB
             regulates brokers, dealers, municipal securities dealers, and municipal
             advisors in the municipal securities market by adopting rules governing
             their conduct, which are subject to SEC approval. However, MSRB does
             not have authority to enforce these rules or examine entities for
             compliance with these rules. Rather, SEC, FINRA, and bank regulators
             enforce MSRB rules and conduct compliance examinations. 13

             The Tower Amendment prohibits SEC and MSRB from directly requiring
             state and local governments to submit information to them prior to sale.
             Specifically, SEC and MSRB cannot require issuers to file any information


             11
               Section 15B(e)(4)(A) of the Exchange Act, as amended by the Dodd-Frank Act, defines
             the term municipal advisor to mean a person (who is not a municipal entity or an
             employee of a municipal entity) that (1) provides advice to or on behalf of a municipal
             entity or obligated person with respect to municipal financial products or the issuance of
             municipal securities, including advice with respect to the structure, timing, terms, and
             other similar matters concerning such financial products or issues, or (2) undertakes a
             solicitation of a municipal entity. According to SEC, the statutory definition of a municipal
             advisor is broad and includes persons who traditionally have not been considered to be
             municipal financial advisors. Pursuant to the Dodd-Frank Act, SEC has issued a proposed
             rule requiring the registration of municipal advisors with SEC, which includes an
             interpretation of the term municipal advisor.
             12
               Disclosure required in the primary market, where these securities are issued, consists of
             official statements. Continuing disclosure is information provided in the secondary market,
             where these securities are bought and sold after issuance.
             13
               FINRA does not have its own rulemaking authority over broker-dealers’ municipal
             securities activities, but enforces MSRB rules for securities firms and bank regulators
             enforce MSRB rules for bank dealers. SEC enforces MSRB rules for all securities firms
             and bank dealers, and for municipal advisors, which may be integrated into or
             independent of broker-dealers.




             Page 5                                                      GAO-12-698 Municipal Securities
with them prior to any sale, and MSRB also cannot require issuers to
provide them or investors with any information either pre- or postsale.
Furthermore, the Securities Act of 1933 exempts the securities that state
and local governments issue from registration with SEC. Securities of
state and local governments also are exempt from the periodic disclosure
requirements of the Exchange Act of 1934. According to a 1975 Senate
report, congressional reasons for the decision to continue to limit direct
regulation of issuers when the 1975 amendments to the securities acts
were enacted included respect for the rights of state governments to
access the capital markets, concerns about the costs of regulation for
state and local government issuers, and the perceived lack of abuses in
the municipal market that would justify such an incursion on the states’
prerogatives. 14

While federal regulators are prohibited from directly requiring issuers to
file presale information on municipal securities, SEC has adopted rules—
applicable to broker-dealers acting as underwriters—that relate to primary
market and continuing disclosures. 15 More specifically, using its authority
over broker-dealers and its broad authority to prevent fraud in connection
with the offer, purchase, or sale of securities, SEC adopted Rule 15c2-12
in 1989. The rule established disclosure requirements related to municipal
securities in response to the need SEC found for increased
transparency. 16 This rule and accompanying guidance obligates
underwriters of municipal securities to obtain and review issuers’ official
statements (typically prepared by issuers or their advisors) and provide




14
  See S. Rep. No. 94-75 (1975).
15
  With limited exceptions, state and local governments issue bonds through a broker-
dealer that underwrites, or sells, their bonds in a public offering to investors. In 2011, 157
broker-dealers underwrote municipal bonds and the 5 largest underwriters accounted for
about 60 percent of par value issued, according to MSRB. MSRB calculated market share
for long-term issues and excluded private placements and remarketing of variable-rate
bonds.
16
  According to a 1993 SEC staff report, SEC adopted Rule 15c2-12 in response to
disclosure deficiencies highlighted in the 1983 default of the Washington Public Power
Supply System, which was the largest payment default in municipal bond history at the
time. They also cited concerns that official statements were not being made available to
investors at initial offerings. See SEC, Division of Market Regulation, Staff Report on the
Municipal Securities Market (September 1993).




Page 6                                                       GAO-12-698 Municipal Securities
them to investors. 17 In addition, the rule was amended in 1995 to require
underwriters to reasonably determine that issuers have entered into a
written continuing disclosure agreement for the benefit of municipal
securities holders to provide (1) annual financial information and
operating data of the type included in the official statement and when and
if available, audited financial statements, and (2) notices of certain
material events. Beginning in 2009, issuers have been obligated by the
agreement to provide the continuing disclosure information and data to
EMMA (either directly or by engaging a third-party dissemination agent to
submit such information and data on their behalf). For a comparison of
key federal disclosure requirements for publicly offered municipal and
corporate securities, see appendix II.

Investors access disclosure information in EMMA at no cost through a
website maintained by MSRB, which created the system in 2008 primarily
to benefit retail investors, also known as individual investors. 18
Documents available in EMMA include official statements (that is,
information provided to investors at the initial offering) that underwriters
must submit. EMMA also makes available postsale information submitted
by issuers or their dissemination agents, including the annual reports of
financial information, notices of certain events, and certain other
categories of information that issuers may voluntarily provide. The events
that issuers (or other obligated persons) must agree to provide notices of
include principal and interest payment delinquencies; unscheduled draws
on debt service reserves reflecting financial difficulties; and bankruptcy,




17
  An “official statement,” which municipal securities underwriters are required to obtain
and review, consists of information about the terms of the proposed offering, financial and
operating data material to an evaluation of the offering, a description of the secondary
market disclosure undertaking to which the issuer agreed, and information on any failure
to comply with any previous secondary market disclosure undertaking in the previous 5
years. 17 C.F.R. § 240.15c2-12(f)(3).
18
 EMMA may be accessed at http://emma.msrb.org.




Page 7                                                     GAO-12-698 Municipal Securities
                       insolvency, receivership and similar events. 19 MSRB allows issuers to
                       voluntarily submit to EMMA on a continuing basis any other types of
                       financial, operating, or event-based information, including (but not limited
                       to) information about bank loans, quarterly or monthly financial
                       information, consultant reports, and capital or other financing plans.
                       According to MSRB, users may conduct searches of issuances on EMMA
                       using one or more of the following parameters: Committee on Uniform
                       Security Identification Procedures (CUSIP) number, issuer name, issue
                       description, obligated person name, state, maturity date, date of
                       issuance, interest rate, and ratings. EMMA provides additional
                       parameters to search for continuing disclosure documents and other
                       information available through EMMA, including trade information.


                       Many market participants told us that primary market disclosure for
Investors and Market   municipal securities investors is generally useful. However, investors and
Participants Cited     market participants with whom we spoke frequently cited limitations to
                       continuing disclosure, including the timeliness of annual financial
Limitations of         information, the frequency with which information is provided, and
Continuing             incomplete information. Our analysis found that current regulatory
Disclosures            requirements for municipal securities disclosure broadly reflect the seven
                       principles of effective disclosure that were developed by the International
                       Organization of Securities Commissions and certain plain English
                       principles developed by SEC. However, regulators and market



                       19
                          SEC Rule 15c2-12 enumerates events for which a notice is to be provided. The
                       following events must be disclosed: (1) principal and interest payment delinquencies with
                       respect to the securities being offered; (2) unscheduled draws on debt service reserves
                       reflecting financial difficulties; (3) unscheduled draws on credit enhancements reflecting
                       financial difficulties; (4) substitution of credit or liquidity providers, or their failure to
                       perform; (5) defeasances; (6) rating changes; (7) tender offers; and (8) bankruptcy,
                       insolvency, receivership or a similar event with respect to the issuer or another obligated
                       person. The following events must be disclosed if they are material: (1) nonpayment-
                       related defaults; (2) modifications to rights of security holders; (3) bond calls; (4) the
                       release, substitution, or sale of property securing repayment of the securities; (5) adverse
                       tax opinions, the issuance by the Internal Revenue Service of proposed or final
                       determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other
                       material notices or determinations with respect to the tax status of the security, or other
                       material events affecting the tax status of the security; (6) the consummation of a merger,
                       consolidation, or acquisition involving an obligated person or the sale of all or substantially
                       all of the assets of the obligated person, other than in the ordinary course of business, the
                       entry into a definitive agreement to undertake such an action or the termination of a
                       definitive agreement relating to any such actions, other than pursuant to its terms; and (7)
                       an appointment of a successor or additional trustee, or a change of name of a trustee.




                       Page 8                                                       GAO-12-698 Municipal Securities
                             participants indicated that, in practice, limitations exist in the current
                             regulatory scheme. Further, the effect on individual investors of limitations
                             to disclosure is largely unknown.


Investors and Market         Many market participants told us primary market disclosure is generally
Participants Most            useful for investors and EMMA has improved investor and market
Commonly Cited               participants’ ability to access disclosure documents, but investors and
                             market participants have identified limitations to disclosure. According to
Timeliness, Frequency, and   MSRB officials, participants in the municipal securities market generally
Completeness as              acknowledge that primary market disclosure—official statements—
Disclosure Limitations       contains the material facts an investor needs to know about an issuer and
                             a security. 20 Investors and market participants such as groups
                             representing investment companies, bond lawyers, and broker-dealers
                             also have indicated that the information provided at the time of issuance
                             is comprehensive. Additionally, most market participant groups with
                             whom we spoke said that MSRB’s EMMA website has greatly improved
                             public access to disclosure compared with the prior system for obtaining
                             disclosure documents. 21 Several market participants said that having a
                             central repository for disclosure documents has made finding information
                             easier and more efficient. In addition, one market participant noted that
                             EMMA increased access to information by allowing investors to receive
                             disclosures for free.

                             However, investors and other market participants cited limitations to the
                             information provided in continuing disclosures. The most frequently cited
                             limitations to the usefulness of this information were: the timeliness of
                             annual financial information, the frequency with which issuers and other
                             obligated persons provided information, and the completeness of the
                             information provided in accordance with the continuing disclosure




                             20
                               There are no detailed requirements regarding the content of an official statement. For
                             purposes of SEC Rule 15c2-12, official statements should include a description of the
                             terms of the security, financial or operating data, a description of the secondary market
                             disclosure undertaking to which the issuer agreed, and other information. In addition,
                             information included in the official statement is subject to the antifraud provisions of
                             federal securities laws.
                             21
                               Prior to July 1, 2009, investors could obtain disclosure information and documents from
                             one of the four Nationally Recognized Municipal Securities Information Repositories, in
                             most cases for a fee.




                             Page 9                                                     GAO-12-698 Municipal Securities
agreement. Individual investors also frequently cited the readability of
disclosures as a limitation.

•    Timeliness—According to investors and other market participants,
     issuers release annual financial information too long after the end of
     their fiscal years for the information to be useful in making investment
     decisions. A Governmental Accounting Standards Board (GASB)
     study of audited annual financial reports prepared in accordance with
     generally accepted accounting principles (GAAP) for state and local
     governments provided for fiscal years ending in 2006, 2007, and 2008
     found that the average time frame for issuing the reports varied by
     type and size of government. For example, issuance time frames
     averaged from 126 days after the end of the fiscal year for large
     special districts to 244 days for small counties. 22 Similarly, according
     to National Association of State Comptrollers data, in fiscal year 2010
     states took an average of 198 days to complete their comprehensive
     annual financial reports. Also, in our case study of disclosures for 14
     securities in EMMA that were issued in 2009, our analysis found that
     the number of days after the end of the fiscal year in which issuers or
     obligated persons provided annual financial information to EMMA
     varied. Annual financial information for a nonprofit hospital system
     was provided 55 days after the end of a fiscal year, while annual
     financial information for a general obligation security issued by a
     school district was provided 257 days after the end of a fiscal year.
     Several investors and market participants said that filings provided
     well after the end of the fiscal year limit the information’s usefulness.
     The GASB study found similar sentiments: less than 9 percent of
     survey respondents—who represented a range of users of financial
     information—considered information received 6 months after the end
     of the fiscal year to be very useful. 23 Three market participants further
     indicated that untimely information was particularly worrisome for
     investors at a time when state and local governments have been



22
   See Governmental Accounting Standards Board, The Timeliness of Financial Reporting
by State and Local Governments Compared with the Needs of Users (Norwalk, Conn.:
March 2011). The study looked at the length of time it took to issue audited financial
reports in compliance with GAAP for all states and a sampling of large and smaller
counties, local governments, school districts, and special districts. Governments surveyed
were not necessarily municipal securities issuers. Also, the study did not include annual
financial information that was prepared using accounting standards other than GAAP.
23
  Users surveyed included municipal bond analysts, legislative fiscal staff, and
researchers at taxpayer associations and citizen groups.




Page 10                                                    GAO-12-698 Municipal Securities
     facing credit stress. Moreover, evidence indicates that issuers have
     not always met the time frames by which they agreed to provide
     annual information. For example, a study by the California Debt and
     Investment Advisory Commission of certain securities issued in
     California from 2005 to 2009 found 11 percent filed more than 30 days
     after the agreed-upon date. 24
•    Frequency—Investors and other market participants also said that
     receiving financial information annually was not sufficient to monitor
     the financial condition of an issuer. An individual investor with whom
     we spoke and a professional analyst both noted that because
     disclosures generally are provided annually, investors often must
     learn important information about the current financial condition of an
     issuer from external sources such as newspaper articles. For
     instance, the individual investor told us that he may read in the
     newspaper that a town that issued securities was having budget
     problems; however, this information would not be disclosed to
     investors until the financial statements for the fiscal year were
     released at some point during the following year. A few market
     participants indicated that obtaining information more frequently was
     especially important for investors during times of economic stress.
     Information that investors and other market participants indicated
     would be useful to receive between annual financial statements
     included unaudited quarterly financial reports, cash-flow reports, year-
     to-date budget updates, and tax revenue information. This type of
     information is not routinely submitted to EMMA on a voluntary basis.
     According to MSRB data, in 2011 EMMA received 8,290 submissions
     categorized as quarterly or monthly financial information (which
     represents 6 percent of all continuing disclosure documents
     submitted) and 358 submissions categorized as interim, additional
     financial information, or operating data. Similarly, quarterly or monthly
     financial information was available in EMMA for 5 of the 14 securities
     in our case study.
•    Completeness—Investors and other market participants said that
     issuers do not always provide all of the financial information, event


24
  See California Debt and Investment Advisory Commission, Municipal Market Disclosure:
CAFR Filings: A Test of Compliance among California Issuers (CDIAC No. 11-04). This
study tested whether issuers submitted certain annual financial information to EMMA
according to the date agreed upon in the underlying continuing disclosure agreement. The
study excluded information about the roles and responsibilities of obligated persons in
submitting disclosure information. A commission representative told us that 59 of the
1,227 issuances studied were conduit issuances that, by definition, would have had an
obligated person other than the issuer.




Page 11                                                  GAO-12-698 Municipal Securities
     notices, or other information they agreed to provide in a continuing
     disclosure agreement for the lifetime of a security. For example, three
     market participants told us that issuers and obligated persons did not
     always file the annual financial information that they agreed to
     provide. Our case study of disclosures for 14 securities in EMMA
     identified similar issues in a few cases. In particular, our analysis
     found that 2 securities—a 2009 general obligation security for a small
     issuer and a 2009 conduit offering with a publicly traded corporation
     as the obligated person—had no financial or other continuing
     disclosures as of May 2012. In addition, a few market participants
     indicated that filings of event notices can be delayed significantly or
     that event notices may never be filed. For instance, one market
     participant said that he had noted cases in which issuers failed to
     report unscheduled draws on debt service or adverse tax opinions.
     Such lapses in reporting may also go undetected. As one market
     participant and a FINRA official noted, an investor or regulator may
     not be able to ascertain if a reportable event had occurred unless an
     event notice was filed with EMMA. Finally, a few market participants
     told us that issuers may provide all of the information they agreed to
     provide for the first few years after a security was issued, but
     afterwards fail to provide some of the information—for instance, tax
     data or operating information.
•    Readability—Individual investors commonly cited concerns about the
     readability of disclosure documents. 25 Four of the 12 individual
     investors with whom we spoke said that disclosure documents were
     not easy to read or understand. Furthermore, most individual
     investors with whom we spoke said that they generally had limited
     time to decide whether to buy a security, leaving them little time to
     research a security. 26 Several individual investors and market
     participants said that disclosures were difficult to understand because
     they contained extensive legal or technical terminology and complex
     information. In addition, two of the individual investors with whom we
     spoke noted that the information for which they looked was “buried” in
     the disclosure documents and not easy to find.



25
  In our case study of securities disclosures in EMMA, we did not systematically analyze
the extent to which disclosures were readable because we could not establish objective
criteria for identifying readability.
26
  For example, some investors said they need to make quick investment decisions when
purchasing municipal securities in the secondary market because securities may be
purchased by another investor within 2 hours.




Page 12                                                   GAO-12-698 Municipal Securities
                             To a lesser extent, investors and other market participants identified
                             additional limitations—including the lack of standardization and limitations
                             of EMMA—to the usefulness of disclosure. Several market participants
                             said that the lack of standardization of disclosure across different issuers
                             impeded their ability to compare issuances. MSRB also stated in a
                             comment letter to SEC in 2011 that many investors have told MSRB that
                             the lack of standardization in disclosure is a problem. 27 MSRB indicated
                             that elements that market participants would like to see standardized
                             included the use of bond proceeds and some basic information, such as
                             the manner of reporting the name of the issuer or other obligated person
                             and information on the source of repayment. Two market participants also
                             told us standardization of accounting methods and the format of
                             disclosures would make disclosures more useful. Also, investors and
                             other market participants described several aspects of EMMA that limited
                             its usefulness. Several market participants noted that the ability to search
                             for issuances was limited, especially if users did not have the CUSIP
                             number for the issuance in which they were interested. 28 Two market
                             participants noted that continuing disclosures sometimes were
                             categorized incorrectly by the issuer at submission to EMMA and one
                             said that issuers may not submit disclosures for all issuances to which
                             they applied.


Current Regulations          We compared requirements for continuing disclosure in SEC Rule 15c2-
Broadly Reflect Disclosure   12 and SEC’s antifraud authorities with principles for effective disclosure
Principles but Some          that were developed by an international organization of securities
                             commissions, which included SEC, and certain plain English principles
Limitations Exist            developed by SEC. 29 These principles include allocation of accountability,
                             continuing disclosure obligation, disclosure criteria, dissemination of
                             information, equal treatment of disclosure, timeliness, and use of plain
                             English in official statements (see app. III for the comparison of the


                             27
                               See Michael G. Bartolotta, “Municipal Securities Rulemaking Board’s Recommendations
                             for Update of 1994 Interpretive Guidance,” MSRB comment letter to SEC,
                             http://www.sec.gov/comments/4-610/4610-69.pdf (Aug. 8, 2011).
                             28
                               A CUSIP number is an identification number assigned to each maturity of an issue
                             intended to help facilitate the identification and clearance of securities.
                             29
                               See International Organization of Securities Commissions, Principles for Ongoing
                             Disclosure and Material Development Reporting by Listed Entities (October 2002). See
                             also SEC, A Plain English Handbook: How to Create Clear SEC Disclosure Documents
                             (Washington, D.C.: August 1998).




                             Page 13                                                 GAO-12-698 Municipal Securities
principles and municipal securities disclosure requirements). We found
that current regulations broadly reflect the seven principles of effective
disclosure. However, regulators and market participants have indicated
that, in practice, limitations exist in the current regulatory scheme,
including the areas of enforceability, content, and efficiency. In particular,
they noted the following:

•     Allocation of accountability—Although security holders may enforce
      continuing disclosure agreements by bringing suit against the issuer
      or obligated person, SEC staff told us that they were not aware of any
      public statements about any such lawsuits having occurred. Also, two
      market participants noted that market participants other than investors
      directly holding a security have no remediation should an issuer or
      obligated person not provide disclosure. SEC and MSRB cannot
      enforce continuing disclosure agreements. In a comment letter to SEC
      in 2011, MSRB stated that because Rule 15c2-12 does not impose
      penalties for noncompliance with continuing disclosure agreements,
      there is limited accountability for those issuers or obligated persons
      that do not provide the information. 30 In addition, various regulatory
      incentives that could encourage issuers to comply with their
      agreements have limitations, according to regulators and market
      participants. For example, regulatory requirements to disclose at
      issuance failure to comply with prior continuing disclosure agreements
      only may work as an incentive to encourage issuers to make required
      disclosures if they anticipate issuing a new security in the future.
      Moreover, SEC staff and two market participants indicated that even if
      issuers anticipated issuing a future security they might not be
      sufficiently incentivized to keep up with their disclosure obligations
      between issuances, as some issuers may only go to market with a
      new issuance from every 3 to 5 years. 31 There are other reasons why
      issuers may not keep up with continuing disclosure responsibilities
      between issuances. A few market participants who work with issuers
      to help prepare disclosures told us that some issuers face challenges
      in complying with their continuing disclosure agreements because of a
      lack of awareness or understanding of their disclosure responsibilities,
      which members of one market participant group said can be due to


30
    See Michael G. Bartolotta, MSRB comment letter to SEC (Aug. 8, 2011).
31
  SEC Rule 15c2-12 requires that final official statements contain, if applicable, a
description of any instances in the previous 5 years in which the issuer or other obligated
person failed to comply, in all material respects, with any previous continuing disclosure
agreement.




Page 14                                                    GAO-12-698 Municipal Securities
    staff turnover and competing priorities in times of budgetary
    challenges. Two small issuers with whom we spoke said that they do
    not have staff dedicated to issuing and monitoring debt, which
    presents a challenge in preparing disclosures.
•   Continuing disclosure obligation—As a condition of an underwriting,
    an underwriter must reasonably determine that issuers or obligated
    persons have agreed to provide certain information on a continuing
    basis. However, this requirement is placed on the underwriter, not
    directly on the issuer of the security. Regulators and market
    participants have noted that this requirement on the underwriter is
    inefficient for several reasons. For example, representatives of two
    market participant groups told us that an underwriter often does not
    have an opportunity to influence the content of a continuing disclosure
    agreement before an issuance, although it is the underwriter’s
    responsibility to ensure the agreement specifies that all required
    information will be provided. Also, FINRA staff noted that should an
    issuer or obligated person not provide continuing disclosure
    information after a security is issued, the underwriter has no means to
    compel them to do so. Furthermore, representatives of two market
    participant groups and a former regulator have indicated that a
    disproportionate amount of the regulatory burden for municipal
    disclosure falls on underwriters. In addition, Rule 15c2-12 does not
    expressly require underwriters to document how they comply with
    requirements to reasonably determine that the issuer or obligated
    person agreed to provide continuing disclosures and that they are
    likely to comply with their continuing disclosure agreement. SEC staff
    said that without this documentation, it may be difficult for an
    underwriter to demonstrate that it met its obligations.
•   Timeliness—Although Rule 15c2-12 requires, as a condition of an
    underwriting, that an underwriter must reasonably determine that
    issuers or obligated persons have specified a date by which they
    agreed to provide the annual financial report, it does not specify what
    that date should be. Therefore, issuers and obligated persons may
    provide annual financial information months after the close of the
    fiscal year.
•   Use of plain English—Regulations do not require the use of plain
    English in municipal securities’ official statements or other disclosure
    documents.
SEC recognizes some of these limitations and has taken recent actions to
improve the timeliness and completeness of continuing disclosures.
Specifically, in June 2010, SEC amended Rule 15c2-12 and issued
interpretive guidance to




Page 15                                          GAO-12-698 Municipal Securities
                            •   specify that event notices be submitted to EMMA in a timely manner
                                not in excess of 10 business days of the occurrence of the underlying
                                event, rather than merely “in a timely manner” as was previously
                                required;
                            •   remove the general materiality condition for determining whether
                                notice of an event is to be submitted to EMMA—thereby, requiring
                                that notification be provided for certain events when they occur
                                regardless of whether they are determined to be material (including
                                principal and interest payment delinquencies, and unscheduled draws
                                on debt service reserves reflecting financial difficulties, among
                                others), while adding separately a materiality condition to select
                                events (including nonpayment-related defaults and bond calls);
                            •   increase the number of events for which notice must be provided;
                            •   remove an exemption from reporting disclosure information for certain
                                variable-rate securities; and
                            •   reaffirm its previous interpretation that underwriters must form a
                                reasonable belief in the accuracy and completeness of
                                representations made by issuers or other obligated persons in
                                disclosures as a basis for recommending the securities, including
                                making a reasonable determination that the issuer will likely provide
                                the continuing disclosure information it agreed to provide. 32


Effect of Limitations of    The risk posed to investors by the limitations of disclosure regulations
Disclosure Regulations on   cited by market participants is largely unknown because (1) there is
Individual Investors        limited information about the extent to which investors use disclosures to
                            make investment decisions, (2) there is limited information about the
Largely Is Unknown          extent to which disclosure limitations about which investors were
                            concerned actually have occurred, and (3) there is a low incidence of
                            defaults and other characteristics of the municipal market that mitigate
                            investor risk. Nevertheless, SEC and MSRB have continuing concerns
                            about disclosure in the municipal market.

                            There is limited information about the extent to which individual investors
                            in municipal securities use disclosures to make investment decisions.
                            Regulators and market participants with whom we spoke did not have



                            32
                              The SEC release states that it would be very difficult for an underwriter to make a
                            reasonable determination that an issuer or obligated person would provide information
                            outlined in a continuing disclosure agreement if the underwriter found that the issuer or
                            obligated person had on multiple occasions during the previous 5 years failed to provide
                            continuing disclosure documents on a timely basis.




                            Page 16                                                    GAO-12-698 Municipal Securities
overall information on the extent to which individual investors in municipal
securities rely on disclosures in making their investment decisions.
However, anecdotal evidence suggests that individual investors’ reliance
on disclosures could be limited. For example, 5 of the 12 individual
investors with whom we spoke said that they relied solely on their broker-
dealers’ advice when making an investment decision, while the others
said that they conducted their own research into securities. Of the 5
investors who said they relied solely on their broker-dealers’ advice, 2
indicated that they did not rely on disclosures because of the difficulty of
understanding them. Similarly, a 2008 SEC study of investor usage of
disclosure documents for stocks, bonds, and mutual funds found that only
2 percent of investors surveyed cited SEC-mandated disclosure
documents—prospectuses and annual reports—as the most important
source of investment information. 33 Rather, surveyed investors most
frequently cited financial advisors or brokers as the most important source
of investment information. 34 Although the SEC study did not focus on
municipal securities, some of the investors surveyed also may have
invested in these types of securities. More importantly, the study provides
a general indication of investors’ usage of disclosure documents and
other sources of information. Many individual investors with whom we
spoke also said that a security’s credit rating has been a main factor in
making investment decisions. However, several of these investors told us
that they have less faith in credit ratings than they did before the financial




33
  The intent of the survey was to measure investor usage of SEC-mandated disclosure
documents and satisfaction with plain English elements used in disclosure documents.
The study concluded that because investors found disclosure documents to contain too
much legal jargon and believed disclosures were too complicated and difficult to
understand, investors often relied on a financial advisor or broker to read these
documents for them. See Abt SRBI, Mandatory Disclosure Documents Telephone Survey,
prepared for SEC Office of Investor Education and Advocacy (New York, N.Y.: July 30,
2008).
34
  According to MSRB staff, the information available through EMMA has an indirect, but
significant, positive effect on individual investors who purchase municipal securities
through broker-dealers. For municipal securities, broker-dealers are obligated under
various MSRB rules to use information available through EMMA to (1) provide disclosure
of material information to customers at or prior to the time of trade under MSRB Rule G-
17, (2) undertake a suitability determination in the case of a recommendation of a
municipal securities transaction under MSRB Rule G-19, and (3) provide fair and
reasonable pricing of municipal securities transactions with customers under MSRB Rules
G-18 and G-30. SEC staff told us that EMMA is an important source of disclosure
information for broker-dealers in relation to the advice they provide individual investors.




Page 17                                                    GAO-12-698 Municipal Securities
crisis, potentially making disclosure information a more important factor in
their future investment decisions.

There is also limited information on the extent to which events relating to
limitations to disclosure cited by investors—such as issuers and other
obligated persons failing to submit information or submitting information
late—have occurred. MSRB has limited ability to track issuances with
missing or late disclosure for several reasons. For example, MSRB
reported that in 2011 it received 1,879 required notices of failure to
provide annual financial information; however, MSRB staff told us that
they could not reliably determine the universe of issuances in EMMA for
which annual financial information was required. 35 This is because EMMA
did not have the capability to easily or systematically differentiate
between securities that should have disclosure submissions and those
that are exempt from SEC Rule 15c2-12, according to MSRB staff. 36 In
addition, it is difficult for MSRB or others to develop reliable information
about issuer compliance with their continuing disclosure agreements for
the universe of outstanding issuances because the structure of continuing
disclosure obligations can vary by issuance, making compliance with
continuing disclosure agreements difficult to systematically identify and
track. As a result, there is limited information on the extent of the
problems.

The low levels of defaults on municipal securities and other
characteristics of the municipal securities market also make it difficult to
determine the importance of disclosure documents as a means of
investor protection. Long-term default rates associated with rated
municipal securities have been less than 1 percent, which is significantly
lower than long-term default rates for rated corporate debt securities (see




35
  A notice of failure to provide annual financial information is one of the types of filings that
an issuer or other obligated person may make pursuant to Rule 15c2-12’s requirement to
provide annual financial information. See Municipal Securities Rulemaking Board,
Municipal Securities Rulemaking Board 2011 Fact Book (Alexandria, Va.: 2012).
36
  MSRB staff said it can be challenging to identify securities subject to Rule 15c2-12
disclosure requirements for a variety of reasons, including the complexity of the
exemptions. Prior to 2011, regulations did not require that the underwriter disclose
whether the issuance was subject to the rule. Many official statements are submitted to
EMMA for securities that are not subject to continuing disclosure requirements.




Page 18                                                       GAO-12-698 Municipal Securities
table 1). 37 In addition, municipal bankruptcy filings historically have been
rare compared with bankruptcy filings by businesses. For 1991 through
2009, 177 municipalities filed for bankruptcy. In contrast, more than
49,000 businesses filed for bankruptcy in the 12-month period ending
March 31, 2009. 38

Table 1: Cumulative Average Default Rates for Municipal and Corporate Issuers (in
Percentages), as of Year-end 2011

                                       Standard & Poor’s                              Moody’s Investors Service
                                  1 year       5 years 10 years                        1 year   5 years    10 years
 U.S. municipal                       0.02          0.10            0.17                 0.01       0.07       0.13
 issuers
 Global corporate                     1.57          6.58            9.83                 1.61       7.24      11.18
 issuers
Source: GAO analysis of data from Standard & Poor’s and Moody’s Investors Service.

Note: Default rates are cumulative average default rates for corporate and municipal debt issuers
rated by each rating agency within 1, 5, and 10 years and indicate the estimated likelihood that an
issuer with an outstanding rating will default in 1, 5, and 10 years, respectively. Different rating
agencies may use different sets of issuers to calculate default rates. We used data from Standard &
Poor’s and Moody’s Investors Service to compare default rates for U.S. municipal issuers and global
corporate issuers by each rating agency. We assessed the reliability of these data and found them to
be reliable for this purpose.


In addition, state and local government issuers have a strong incentive to
meet their payment obligations because issuances of municipal securities



37
  Corporate debt securities that have been registered and whose issuers are subject to
the periodic reporting requirements are subject to SEC disclosure requirements. Although
default rates in the municipal securities market remain low, they can vary by sector.
According to a 2011 report by a rating agency, over the last 30 years, two-thirds of all
defaults have been associated with the industrial development, health care, and housing
sectors. See Kroll Bond Ratings, An Analysis of Historical Municipal Bond Defaults:
Lessons Learned -The Past as Prologue (Nov. 14, 2011). In response to these defaults,
the market has demanded more frequent disclosure in some cases, according to MSRB
staff as well as two market analysts. For instance, three of these sources told us that
issuers or obligated persons in the health care sector frequently provide financial
information on a quarterly basis. Based on our case study of disclosures, the issuer or
obligated person for four of the five issuances from the health care sector provided
quarterly or monthly financial information in EMMA.
38
  See Neil O’Hara and Securities Industry and Financial Markets Association, The
Fundamentals of Municipal Bonds, 6th ed. (Hoboken, N.J.: John Wiley & Sons, 2012):
174-175; and United States Courts, “Bankruptcy Filings Highest Since 2006,” May 14,
2010, accessed May 10, 2012, at http://www.uscourts.gov/News/NewsView/10-05-
14/Bankruptcy_Filings_Highest_Since_2006.aspx.




Page 19                                                                              GAO-12-698 Municipal Securities
constitute an important tool to finance critical projects, and defaults may
hinder their ability to issue future securities and may adversely affect
other issuers of municipal securities in the surrounding area. Defaulted
municipal securities also have a relatively high recovery rate for investors
compared to corporate securities, according to two rating agencies—with
one reporting a recovery rate of 67 percent for municipal securities
compared with 40 percent for corporate securities. 39 Some states also
have mechanisms intended to address financial crises, allowing for state
intervention into a local government’s finances. 40 Finally, 30 states have
laws that give holders of general-obligation and certain other securities
issued by municipalities within their states first rights to repayment from
certain revenue streams, even during bankruptcy. 41

Nevertheless, SEC and MSRB have expressed continuing concerns
about municipal securities disclosure due to individual investors
constituting a significant portion of the market, the size of the market,
default risk, and incomplete disclosure. SEC staff told us that disclosure
by municipal issuers should be improved in general as it relates to the




39
  In the event of default, the bond indenture may provide for recoveries in one of two
ways: (1) the borrower may cure the default and resume paying full debt service, or (2)
collateral backing the bonds may be liquidated. Debt service payments also may be made
by a third-party guarantor. The study includes defaulted securities from January 1980
through October 2002. See David Litvack and Mike McDermott, Municipal Default Risk
Revisited, Fitch Ratings (New York, N.Y.: June 23, 2003).
40
  Notably, Jefferson County, Alabama, which filed for the largest municipal bankruptcy in
U.S. history in November 2011, defaulted on a general obligation bond payment due in
April 2012. Prior to the bankruptcy, the state court in Alabama had appointed a receiver
for Jefferson County’s troubled sewer system, receivership being a potential remedy that
some states allow.
41
   Whether a particular security has these protections depends on the structure of the
financing and the statutory authorization for the security. The authors conducted a 50-
state survey of rights and remedies provided by states to investors in municipal bond debt.
See James Spiotto, Ann Acker, and Laura Appleby, Municipalities in Distress? How States
and Investors Deal with Local Government Financial Emergencies, 1st ed. (Chicago, Ill.:
James E. Spiotto and Chapman and Cutler LLP, February 2012): 254-255.




Page 20                                                   GAO-12-698 Municipal Securities
primary market and continuing disclosure. 42 In rulemakings, SEC staff
have noted concern about the size of the municipal securities market and
that, while defaults of municipal securities are rare, they do occur.
Furthermore, the significant pressure on state and local government
budgets and the diminishment of bond insurance since the recent
financial crisis have increased focus on disclosure issues, according to
SEC and MSRB staff. 43 MSRB staff noted in 2010 that although the
municipal securities market largely weathered the 2008 financial crisis,
economic conditions and financial liabilities continued to stress municipal
bond issuers. SEC staff also told us that recent SEC enforcement actions
highlight risks posed by pension funding obligations. 44 Furthermore, SEC


42
   SEC staff told us that improved disclosure by municipal issuers could benefit individual
investors and also may have positive effects on pricing and liquidity. In a previous report
on the municipal securities market, we noted that municipal broker-dealers generally
determine the prices at which they are willing to trade by making relative assessments of a
security's market value. Broker-dealers with whom we spoke identified several factors as
relevant to their pricing determinations, including the characteristics and credit quality of
the security (which broker-dealers can infer by reviewing information from issuers'
financial disclosures posted on EMMA). Broker-dealers stated that their ability to
understand the credit risk of a particular security rested primarily on their ability to obtain
timely, comprehensive issuer disclosures. We also noted that while MSRB has increased
the amount of information available to all investors through its EMMA website—including
price information on past trades and issuer disclosures—institutional investors with whom
we spoke generally had more resources and expertise to assess prices than individual
investors. In particular, they had (1) access to more sources of pretrade price information
in the form of offerings and bids provided through their large networks of broker-dealers,
(2) access to more user-friendly posttrade information through third-party vendors and
their networks of broker-dealers, and (3) more market expertise to help them incorporate
other available information. See GAO-12-265.
43
  Bond insurance provides securities with the rating of the bond insurer and guarantees
investors timely interest payments and, if the issuers default, the return of principal.
According to Thomson Reuters data in the 2006 and 2011 Bond Buyer Yearbook, in 2005,
nine highly rated bond insurers insured about 57.1 percent of new issue volume (51
percent of newly issued securities). By 2010, there was only one active bond insurer in the
market, providing insurance to approximately 6.2 percent of new issue volume (12 percent
of newly issued securities).
44
  Some analysts have expressed concern in light of the recent financial downturn about
the financial stress placed on state and local governments by pension liabilities. We
recently reported that most state and local government pension plans have assets
sufficient to cover their benefit commitments for a decade or more. We also found that
states and localities have implemented various changes to their pension systems since
2008 that were intended to help improve long-term plan sustainability. However, growing
budget pressures will continue to challenge the ability of state and local governments to
provide adequate contributions to help sustain their pension plans. See GAO, State and
Local Government Pension Plans: Economic Downturn Spurs Efforts to Address Costs
and Sustainability, GAO-12-322 (Washington, D.C.: Mar. 2, 2012).




Page 21                                                      GAO-12-698 Municipal Securities
                         and MSRB leadership have publicly voiced concerns about various
                         aspects of the municipal securities market. Examples of their concerns
                         include the following:

                         •     An SEC Commissioner remarked that investors may have trouble
                               understanding the risks associated with increasingly complex
                               structures used by large and small municipalities. 45
                         •     A former SEC Chairman stated that the opacity of the municipal
                               market was unrivaled and presented a significant threat to the U.S.
                               economy. 46
                         •     An SEC Commissioner was concerned that investors might not have
                               access to the information they needed to accurately calculate their
                               risks when making investment decisions. She stated at an SEC field
                               hearing on the municipal market in 2010 that municipal market
                               investors were afforded second-class treatment compared with that
                               afforded to investors in other securities because they could not count
                               on receiving accurate and timely financial and other material
                               information about their investments. 47
                         •     MSRB stated in a comment letter to SEC in 2011 that MSRB received
                               complaints about some issuers’ disregard for their continuing
                               disclosure agreements and failure to provide information on time or at
                               all. 48


                         Experts and market participant groups we surveyed suggested a number
Options for Improving    of options for improving municipal securities disclosure. Some of the
Disclosure Involve       options would require statutory changes while others could be achieved
                         within existing statutory authority. Each of the suggested options involves
Potential Benefits and   trade-offs, and market participants and the regulators’ views on the
Challenges               efficacy of the options varied. Our discussion of potential benefits
                         provided to investors and potential costs of implementing these options is
                         limited to the views of survey and interview participants.


                         45
                           See Elisse B. Walter, “Regulation of the Municipal Securities Market: Investors Are Not
                         Second-Class Citizens,” speech at the A. A. Sommer, Jr. Corporate, Securities and
                         Financial Law Lecture (New York, N.Y.: Oct. 28, 2009).
                         46
                           See Arthur Levitt Jr., “Muni Bonds Need Better Oversight,” Wall Street Journal (May 9,
                         2009).
                         47
                           See Elisse B. Walter, “Statement at SEC Field Hearing on the State of the Municipal
                         Securities Market,” (San Francisco, California: Sept. 21, 2010).
                         48
                             See Michael G. Bartolotta, MSRB comment letter to SEC (Aug. 8, 2011).




                         Page 22                                                   GAO-12-698 Municipal Securities
Some Options Identified to      Experts and market participant groups we surveyed suggested some
Improve Disclosure Would        options to improve disclosure that would require statutory changes. While
Require Statutory Changes       many suggested repealing the Tower Amendment, regulators said it
                                would have no effect on what they could require issuers to disclose. SEC
                                staff said the Securities Act exempts municipal issuers from SEC
                                registration requirements. MSRB does not otherwise have affirmative
                                authority to regulate issuers. They said additional statutory changes
                                would be needed for regulators to implement other options we identified
                                for improving disclosure that included prescribing accounting standards,
                                requiring time frames for annual reporting or more frequent disclosure,
                                and requiring certain conduit borrowers to comply with corporate
                                disclosure requirements.

Many Survey Respondents         Seven of 21 experts we surveyed suggested that Congress repeal the
Suggested Repealing the Tower   Tower Amendment—provisions that prohibit SEC and MSRB from
Amendment, but Regulators       requiring issuers to file any information with them prior to any sale, and
Said It Would Have No Effect    MSRB from requiring issuers to provide them or investors with any
on Disclosure                   information pre- or postsale. Some experts believe that repealing these
                                provisions would allow federal regulators to directly require issuers to
                                provide continuing disclosures, and thereby address concerns about
                                incomplete submissions or failures to meet obligations under continuing
                                disclosure agreements, but SEC and MSRB staff did not agree and said
                                additional changes would be needed for them to directly regulate issuers.

                                As noted previously, the Tower Amendment prohibits SEC and MSRB
                                from requiring state and local governments to file presale information with
                                them in connection with the issuance, sale, or distribution of municipal
                                securities. MSRB is further limited by a prohibition against requiring any
                                issuer to furnish it or any purchaser or prospective purchaser with any
                                document or report about the issuer, except for documents and
                                information that generally are available from a source other than the
                                issuer. Some industry participants believe the Tower Amendment
                                prohibits any regulation of municipal issuers, while others believe its
                                scope is narrower and addresses only prefiling requirements. SEC staff
                                noted that repealing the Tower Amendment would have no real effect on
                                disclosure because of exemptions under the Securities Act. SEC and
                                MSRB staff agreed that repealing the Tower Amendment would remove a
                                prohibition on requiring issuers to file presale information. However, they
                                said such repeal would have no effect on their ability to establish
                                disclosure requirements for issuers with respect to primary or continuing
                                disclosures. SEC staff told us that the Securities Act provision that
                                broadly exempts municipal securities from SEC’s registration
                                requirements means that the registration requirements applicable to


                                Page 23                                         GAO-12-698 Municipal Securities
corporate issuers do not apply to municipal securities offerings. In
addition, the periodic reporting requirements of the Exchange Act do not
apply to issuers of such municipal securities. MSRB does not otherwise
have affirmative authority to regulate municipal issuers. As a result, SEC
and MSRB staff told us that Congress may need to provide SEC or
MSRB with affirmative authority or amend exemptions under federal
securities laws to establish disclosure requirements directly on municipal
securities issuers. 49

Four market participant groups we surveyed and others (including
issuers) with whom we spoke discussed potential challenges to issuers of
expanding regulator authority. They expressed concern over the costs of
federal regulation as well as the potential infringement on state and local
government rights. According to a market participant group with whom we
spoke, an increase in the costs of accessing the market could prohibit
some issuers from raising capital in the public market and lead some
issuers to pursue other options for raising capital, such as through private
bank loans. In addition, a market participant group representing issuers
said the basic tenets of federalism and the importance of federal-state
comity behind the Tower Amendment were important considerations in
weighing potential options for improving municipal disclosure.

While neither SEC nor MSRB had indicated to us they were seeking
additional authority to regulate issuers, SEC staff indicated that additional
authority would be helpful to improve disclosure by municipal issuers.
Staff of each regulator had similar views on how to most appropriately
use any additional authority that could be granted to regulate disclosure
by municipal issuers.

•    First, staff generally agreed that the securities registration regime for
     public companies would be inappropriate for the municipal securities
     market. With approximately 50,000 issuers and 1.3 million separate
     outstanding securities, SEC staff said the additional resources
     potentially needed to review and declare effective registration
     statements would be extensive, and an MSRB official said regulating




49
  SEC staff expect to release a staff report on the municipal securities market in 2012 that
includes legislative, regulatory, and industry best practices and recommendations to SEC
Commissioners for measures to improve primary and secondary market disclosure
practices, measures to improve market practices, and associated regulation.




Page 24                                                    GAO-12-698 Municipal Securities
                                 municipal issuers would be beyond MSRB’s current resource
                                 capabilities.
                             •   Second, SEC and MSRB staff recognize that potential continuing
                                 disclosure requirements could have costs for issuers, such as small or
                                 infrequent issuers, although limited information exists on the universe
                                 of issuers, and issuers that might be affected.
                             •   Third, SEC and MSRB staff told us broad-based or marketwide
                                 standardized disclosure would not be favorable for the municipal
                                 market. Rather, SEC staff told us disclosure requirements could be
                                 principles-based. Principles-based disclosure is an approach that
                                 would involve establishing key objectives of good reporting and
                                 providing guidance and examples to explain each objective. MSRB
                                 staff agreed that disclosure requirements should be tailored, noting
                                 that the market is highly diverse in terms of the structure of financings
                                 and the issuing community. Staff from both regulators said any
                                 disclosure requirements for municipal securities issuers would need to
                                 reflect the diversity of issuers as well as the federal interest in investor
                                 protection.
                             •   Fourth, SEC and MSRB staff stated that regulation of municipal
                                 securities must balance investor protection and intergovernmental
                                 comity. For example, SEC staff told us any federal regulation of
                                 municipal securities disclosure should be flexible and adaptable, so
                                 that regulators could account for issues of comity and other political
                                 realities present in the municipal market.
Additional Options for       In addition to repealing the Tower Amendment, many of the experts and
Improving Disclosure Would   market participants we surveyed identified additional options that would
Require Other Statutory      require statutory changes. These include prescribing accounting
Changes                      standards and requiring time frames for annual reporting, requiring more
                             frequent disclosure, or requiring certain conduit borrowers to comply with
                             corporate disclosure provisions. According to SEC and MSRB staff,
                             Congress would need to provide SEC or MSRB with authority to
                             implement any of these options.

                             Prescribe Accounting Standards

                             Five of 21 experts we surveyed and a market participant group with whom
                             we spoke suggested federal regulators should prescribe accounting
                             standards for the financial information issuers disclose in EMMA. These
                             suggestions included that SEC should be provided authority to prescribe
                             accounting standards or regulators should require issuers to comply with




                             Page 25                                            GAO-12-698 Municipal Securities
GAAP for state and local governments. 50 Additionally, three market
participant groups suggested regulators should have authority to simplify
GAAP standards to more efficiently meet investor needs and reduce
compliance costs for issuers. According to MSRB staff, Congress could
provide MSRB authority to regulate issuers and authorize accounting
standards without needing to repeal the Tower Amendment. According to
MSRB staff, without statutory changes, MSRB could use existing
authority to prohibit broker-dealers from underwriting new securities
without an issuer of such securities committing to follow GAAP or other
accounting standards. However, an MSRB official also told us that
approach would be less effective than directly regulating issuers, an
unreasonable burden on broker-dealers, be difficult to comply with and
enforce, and could be viewed as an indirect obligation for issuers.

According to an expert, a market participant group, and SEC staff with
whom we spoke, standardized accounting requirements could benefit
investors by facilitating comparability of financial information across
different issuers and securities, and make annual financial information
easier to understand, particularly for individual investors. We previously
reported that many industry participants think GAAP-basis financial
statements provide a fuller, more transparent picture of a government’s
financial position than those prepared in accordance with other bases of
accounting. 51 Reporting of pension liability is one of the areas that market
participants and experts we surveyed said should be improved. Appendix
IV provides information on several industry-driven efforts to improve
pension liability reporting in municipal securities disclosure documents.

However, according to some interview and survey participants, issuers
could face challenges in complying with standardized accounting
requirements. According to a market participant group and small and
conduit issuers with whom we spoke, as well as 2 of 21 experts we
surveyed, complying with complex and changing GAAP standards would
be too costly for smaller issuers that may not have full-time accounting
staff and lack technical expertise. Some issuers also told us a



50
 GASB establishes GAAP for state and local governments. However, issuers of
municipal securities are not required to prepare financial statements according to GAAP.
51
  See GAO, Dodd-Frank Wall Street Reform Act: Role of Governmental Accounting
Standards Board in the Municipal Securities Markets and Its Past Funding, GAO-11-267R
(Washington, D.C.: Jan. 18, 2011).




Page 26                                                   GAO-12-698 Municipal Securities
requirement to follow GAAP would be an unfunded mandate, particularly
for small or infrequent borrowers because they would be required to
invest in the staff time and expertise to prepare financial statements they
would not otherwise prepare. 52 Some issuers also questioned the
potential benefits to investors of mandated GAAP compliance, saying that
statements that comply with GAAP provide too much irrelevant
information to investors.

An MSRB official told us authority to prescribe accounting standards
would be more appropriate for SEC, as such authority would be within its
regulatory purview because of its oversight of the corporate market. 53
MSRB stated it had neither the expertise nor resources to determine
appropriate accounting standards and likely would not support such
action. An MSRB official told us that appropriate due diligence and
consideration of the balance of benefits and burdens should be
conducted before requiring all issuers to comply with GAAP standards
because of the significant impact such a mandate could have on issuers.
SEC staff told us SEC had not expressed a view on whether SEC should
have authority to prescribe accounting standards used in primary and
continuing municipal disclosure documents. SEC staff told us it could be
desirable to require municipal issuers to use GAAP-basis accounting for
their securities offerings, but it may be appropriate to first apply any
requirement to the largest and most frequent municipal issuers. In 2009,
an SEC Commissioner suggested that legislation could provide SEC with
authority to require municipal issuers to use GAAP and recognize the
financial accounting and reporting standards of an accounting standard-


52
   Because of the number of issuers—estimated at more than 50,000—our examples only
illustrate categories of costs that could affect issuers.
53
  SEC has statutory authority to establish financial accounting and reporting standards for
publicly held companies, but has looked to private-sector standard-setting bodies to
develop these accounting principles and standards. For example, SEC had recognized the
Accounting Principles Board as the authoritative source for GAAP until 1973. Since the
formation of the Financial Accounting Standards Board (FASB) in 1973, SEC has
designated FASB as the private-sector standard-setter whose accounting principles are
recognized as “generally accepted” for purposes of federal laws for public companies. The
Sarbanes-Oxley Act of 2002 established criteria that must be satisfied for the work product
of an accounting standard-setting body to be recognized as “generally accepted.”
Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 108, 116 Stat. 745 (2002). In 2003,
SEC reaffirmed FASB as the private-sector standard setter. Commission Statement of
Policy: Reaffirming the Status of the FASB as a Designated Private-Sector Standard
Setter, Securities Act Release No. 8221, Exchange Act Release No. 47,743 (Apr. 25,
2003).




Page 27                                                   GAO-12-698 Municipal Securities
setting body, such as GASB, as “generally accepted.” 54 In a 2010 speech
at a securities regulation seminar, the Commissioner identified options for
improving municipal securities disclosure that SEC would examine in an
ongoing review of the municipal securities market. 55 They included
mandating the use of uniform accounting standards, such as GAAP
standards.

Require Time Frames for Annual Reporting

Four of 21 experts and 4 of 21 market participant groups we surveyed,
and 2 market participant groups we interviewed, suggested that federal
regulators should require issuers to submit annual financial statements
and operating information on a timely basis. Suggestions included that
state and local government issuers should meet a standard of 120 or 180
days, or adhere to the same standard as corporate issuers. 56 Improving
timeliness could benefit the market by helping build investor confidence in
a particular security or issuer and thereby increase investor demand for
municipal securities, according to 3 of the market participant groups and 1
of the experts. In turn, increased demand theoretically could improve
pricing and increase liquidity, but to what extent this would be the case is
unknown. While SEC requires in Rule 15c2-12, as a condition of an
underwriting, that an underwriter must reasonably determine that the
issuer or obligated person has agreed in a continuing disclosure
agreement to specify the date on which annual financial information will
be provided, SEC does not have authority to enforce this aspect of the
agreement.

Issuers discussed potential challenges of meeting shorter annual
reporting time frames. Large issuers (including states, cities, and a
county) told us a dependence on other entities—including component
units of government—for information could prohibit entities that satisfy
their annual reporting obligation by submitting audited financial
statements from completing audited financial statements in shorter time



54
 See Elisse B. Walter, “Regulation of the Municipal Securities Market: Investors Are Not
Second-Class Citizens” (New York, N.Y.: Oct. 28, 2009).
55
 See Elisse B. Walter, “Remarks before the Forty-third Annual Regulation Securities
Seminar,” (Los Angeles, Calif.: Oct. 29, 2010).
56
  Corporate issuers adhere to a 60-, 75-, or 90-day reporting standard based on their size
and market capitalization.




Page 28                                                   GAO-12-698 Municipal Securities
frames. 57 A state conduit issuer said some issuers might rely on a state to
reconcile Medicare payments after the close of the fiscal year before they
could report GAAP-compliant financial statements. In addition, some
issuers said a limited availability of auditors of governmental entities could
impede issuers from complying with a mandated annual reporting time
frame. 58 Some states require their local governments to use state
auditors, in which case the local government might have little to no control
over the timing of the audit. Other states use private-sector auditors, and
several issuers told us that there is a shortage of these auditors. For
example, an issuer from Wisconsin noted that major accounting firms
have reduced staff resources supporting public-sector audits, and smaller
auditing firms also have moved away from government audits.

MSRB staff discussed with us their perspectives on possibly requiring
issuers to provide annual financial information on a timelier basis. They
said the diversity of the issuer community and significant impediments to
implementing such an option would need to be evaluated before putting in
place such a requirement. In response to market participant concerns that
information needed to make informed investment decisions is stale in
many cases, MSRB recently developed features in EMMA that allow
issuers, obligated persons, and parties providing disclosure upon their
behalf, to voluntarily specify a time frame of 120 or 150 days for
submitting annual financial information.

Require Quarterly Reporting

Three market participant groups we interviewed and 1 of 21 market
participant groups we surveyed told us federal regulators should require


57
   Component units, according to GASB Statement 14 as amended by Statement 61, are
legally separate organizations for which a primary government is financially accountable
or other organizations whose relationship with a primary government is such that their
exclusion from annual financial statements would be misleading. Both states and smaller
units of government have component units. For example, colleges can be component
units of states and school districts can be component units of cities or counties. A recent
report by a working group from the National Association of State Auditors, Comptrollers,
and Treasurers said the majority of state issuers lack control or influence over the
preparation or timing of component unit audits. Large issuers told us it would be
challenging to compile information from component units in shorter time frames, as
primary governments lack supervisory power to require component units to provide
financial information within shorter time frames.
58
  By auditors of governmental entities, we mean both government auditors and private-
sector auditors of governmental entities.




Page 29                                                    GAO-12-698 Municipal Securities
issuers to disclose unaudited financial information on a quarterly basis in
EMMA, similar to requirements for corporate issuers. According to 3
market participant groups, more frequent reporting could help provide
investors with more timely, relevant information.

Four of seven large issuers and three of six small issuers told us they
posted interim financial information to their websites, including unaudited
quarterly financial statements and budget reports. Three other small
issuers that produced interim financial reports told us they did not post
such information on their websites, but could provide it to investors or
others on request. Issuers that already produce interim financial
information could face minimal cost to submit it to EMMA. Additionally,
members of a market participant group representing issuers said
unaudited interim financial information might be easier for issuers to
prepare than annual audited financial reports (for issuers that fulfill their
annual reporting obligation as agreed in their continuing disclosure
agreement by providing audited annual financial statements) and provide
investors with more current and relevant information. One market
participant group representing issuers told us smaller issuers could have
a greater incentive to disclose interim financial information for the benefit
of investors out of competitive pressure as more issuers adopted the
practice.

However, issuers and a market participant group indicated that a
requirement for issuers to provide quarterly information to EMMA could
be costly, would involve liability concerns, and could result in a limited
presentation of financial information that excludes information on accrued
assets and liabilities. Some large, small, and conduit issuers with whom
we spoke said preparing interim financial information for EMMA would
require additional staff resources and, with governments’ limited
resources, likely would result in issuers reallocating staff resources from
other areas. For example, several large issuers and conduit issuers told
us they and others would need to hire additional accounting staff if
required to provide standardized quarterly financial reports. Large and
small issuers also cited concerns about their liability under SEC’s
antifraud authority of posting unaudited financial information to EMMA,
and a market participant group suggested that issuers would be more
willing to disclose interim information if they could disclaim liability from
the antifraud provisions of the federal securities laws. SEC staff told us
that issuers and others cannot disclaim liability or responsibility for their
disclosures under the antifraud provisions. Finally, several large and
small issuers with whom we spoke and 1 of 21 market participant groups
we surveyed said significant adjustments that some government entities


Page 30                                           GAO-12-698 Municipal Securities
make only at year-end to meet GAAP requirements would make it
infeasible to determine an issuer’s financial condition from interim
financial reports, as interim information would provide an incomplete
picture of an issuer’s financial condition.

In a 2010 speech to the Investment Company Institute, the SEC
Chairman stated that requiring periodic disclosure of financial
information—such as tax revenues, expenditures, tax base changes, or
pension obligations—could help improve municipal securities
disclosure. 59 Further, MSRB staff told us quarterly disclosure could
enable investors to better compare different types of securities, as more
information would be available for comparative analyses. In addition, they
said more frequent disclosure in theory could increase liquidity and
improve pricing, but it would be difficult to determine to what extent, and
whether, more frequent disclosure would increase liquidity and improve
pricing. MSRB staff told us variation among the issuer community also
constitutes a significant barrier to mandating more frequent disclosures.
They said a tailored approach would be more effective than a one-size-
fits-all requirement for issuers to provide more frequent disclosure
information.

Require Certain Conduit Borrowers to Comply with Corporate
Disclosure Requirements

Four of 21 experts and 1 of 21 market participant groups we surveyed
and several issuers we interviewed said SEC should require corporate
borrowers that issue debt in the municipal market to comply with
disclosure requirements for corporate issuers because this sector has
been responsible for most payment defaults. 60 Although a few sectors of
the municipal market with corporate borrower participation provide
disclosure beyond that required by Rule 15c2-12, not all do. According to
SEC staff with whom we spoke, requiring corporate disclosure of conduit
borrowers would require certain statutory action to repeal Securities Act
exemptions for certain types of securities; however, the Tower
Amendment could remain in place. While the Tower Amendment restricts


59
  See Mary L. Schapiro, “Remarks at Investment Company Institute 2010 General
Membership Meeting,” speech as delivered by Andrew J. Donohue (Washington, D.C.:
May 7, 2010).
60
  Survey respondents and issuers with whom we spoke did not advocate changes to the
exemption for nonprofit conduit borrowers.




Page 31                                               GAO-12-698 Municipal Securities
SEC from requiring prefiling information from municipal securities issuers,
the restriction does not apply to conduit borrowers, as they are not
municipal securities issuers. Whether a corporate conduit borrower is
subject to registration and reporting requirements for public companies
would depend on whether the corporate conduit borrower qualified for a
specific exemption under the Securities Act.

Two market participant groups and an expert with whom we spoke
suggested that applying corporate disclosure requirements to conduit
borrowers would provide a risk-based approach to improving disclosure.
They said focusing changes of disclosure rules on the highest-risk sectors
of the market would improve investor protection in the areas of greatest
need. One expert we surveyed said conduit borrowers should be required
to provide investors with more information because conduit borrowers
benefit financially from reduced interest rates on tax-exempt municipal
bonds. The expert said eliminating exemptions for corporate borrowers
could provide clarity to investors on what entities issue debt in the
municipal market, and could provide investors with access to the same
registration and disclosure information that otherwise would be available
on the same entities if issuing securities in the corporate market. While
eliminating exemptions for conduit borrowers could improve transparency,
one small issuer told us there could be some costs to government
issuers, as some local governments may be required to assume
development costs. Conduit issuers agreed that eliminating exemptions
could increase costs to conduit borrowers and cause some to leave the
market—in theory, leading to lost economic development opportunities.

SEC staff have recommended that the exemption provided by Section
3(a)(2) of the Securities Act be eliminated for corporate conduit
borrowers. 61 In 1994, SEC supported this option, but the current
commission has not taken a position on this issue. SEC staff have been
examining this issue as part of their ongoing study of the municipal
securities market. MSRB staff said market participants reported that


61
  Statement of the Commission Regarding Disclosure Obligations of Municipal Securities
Issuers and Others, Securities Act Release No. 7049, Exchange Act Release No. 33,741,
56 SEC Docket 479 (Mar. 9, 1994). Section 3(a)(2) exempts from registration under the
Securities Act certain types of industrial development bonds, which corporate entities
typically issue through governmental entities. For the relevant staff reports, see SEC, Staff
Report on the Municipal Securities Market (Washington, D.C.: Sept. 1993), and Disclosure
and Accounting Practices in the Municipal Securities Market (Washington, D.C.: Jul. 26,
2007).




Page 32                                                     GAO-12-698 Municipal Securities
                           municipal securities with conduit borrowers in some sectors have been
                           less compliant with continuing disclosure agreements than other types of
                           municipal securities. They said planned improvements to EMMA could
                           help users identify and track conduit issuances, which could aid conduit
                           borrowers in managing their continuing disclosure obligations or help
                           regulators and investors track securities with conduit borrowers.


Other Options for          Experts and market participant groups we surveyed and others with
Improving Continuing       whom we spoke suggested other options for improving disclosure that
Disclosure Could Be        could be implemented within the existing regulatory framework. These
                           included further improving the functionality of EMMA and strengthening
Achieved within Existing   efforts to promote EMMA to issuers and investors. Other options included
Regulatory Framework       expanding SEC enforcement activities and improving the readability and
                           usefulness of disclosure information by providing guidance or requiring
                           use of plain English in disclosures.

Improve and Promote EMMA   Six market participant groups with whom we spoke and 4 of 21 experts
                           and 3 of 21 market participant groups we surveyed told us EMMA was a
                           significant improvement from the former system for distributing disclosure,
                           and 2 market participant groups said its usefulness had improved since it
                           was first implemented. Members of a group representing issuers said the
                           system provided issuers greater certainty about their compliance with
                           continuing disclosure agreements, as EMMA allows issuers to verify what
                           information they submitted to the system and where it was posted online.
                           When using the former system, issuers mailed in paper documents and
                           lacked the ability to see whether information was filed or if it had been
                           categorized correctly. They said EMMA had made it easier to more
                           accurately file disclosure information, as it was easier to associate
                           disclosure information with appropriate identifiers (CUSIP numbers).

                           Nevertheless, 6 market participant groups we interviewed and 3 of 21
                           market participant groups and 2 of 21 experts we surveyed suggested
                           further improvements to EMMA could benefit disclosure. 62 Suggestions
                           for improving EMMA included making it easier for investors to find specific
                           securities, making it easier for investors to determine whether financial
                           information had been submitted, and ensuring that information was



                           62
                             MSRB has issued a long-range plan for further developing the EMMA system, which we
                           discuss later in this report.




                           Page 33                                               GAO-12-698 Municipal Securities
properly coded to appropriate categories and securities. According to one
market participant group with whom we spoke, further improving EMMA’s
functionality would reduce the time and level of effort required of EMMA
users to understand the significance of the information provided. Two
market participant groups representing issuers told us that while EMMA
has made it easier for them to manage their investor disclosures and
determine whether disclosures are publicly available, additional
improvements would further increase the functionality and usefulness of
the system. MSRB staff agreed that further improving EMMA would
encourage greater issuer discipline in complying with continuing
disclosure agreements, because functionality improvements to EMMA
could provide investors better access to disclosure information and, in
turn, increase investor demand for disclosure in EMMA.

Four of 21 market participant groups we surveyed and 3 others with
whom we spoke said regulators could strengthen efforts to educate
issuers on their disclosure responsibilities. For instance, three market
participant groups we interviewed told us some issuers have not yet
submitted information to EMMA because they might not be aware of their
disclosure obligations under their continuing disclosure agreements.
Regulators discussed with us their efforts to educate issuers about
EMMA. MSRB’s primary education focus for the first year after launching
EMMA was to inform and train issuers on their new obligations to file
disclosure information to EMMA. According to MSRB staff, these efforts
included providing industry conference presentations, developing
webinars, creating a call center to provide support to issuers submitting
information to EMMA, and posting a list of frequently asked questions on
the MSRB website. While these efforts have continued, MSRB has
updated its issuer education focus from introducing EMMA to how to
leverage EMMA to communicate directly with investors. In November
2011, MSRB launched a toolkit for state and local government issuers on
its website, which included information on making continuing disclosure
submissions to EMMA and how issuers can better use the information
available on EMMA. While MSRB staff view MSRB’s initial issuer
education efforts as successful because frequent issuers are aware of
EMMA and MSRB received positive feedback from the issuer community,
they said additional work was needed to educate infrequent, small
issuers.

Four of 21 market participant groups and 1 of 21 experts we surveyed
also suggested that regulators could strengthen efforts to improve
investor awareness of EMMA, as the extent to which individual investors
use EMMA is difficult to ascertain. More specifically, 7 of the 12 individual


Page 34                                           GAO-12-698 Municipal Securities
                         investors with whom we spoke did not use EMMA to obtain disclosure
                         information because a few said they were not aware of EMMA and
                         several said they relied on advisors for investment advice and information
                         instead of conducting their own research.

                         Regulators said they expected investor awareness of EMMA to improve
                         over time, and described the extent of their efforts to make investors
                         aware of EMMA. In 2009, MSRB initiated an education and outreach
                         effort to raise awareness of EMMA among investors and others who act
                         on their behalf, and to promote use of the site by market participants.
                         MSRB has used websites, social media, search engines, print and
                         broadcast media, and public speaking engagements, among other things,
                         to communicate to investors, issuers, and the broker-dealer community
                         about EMMA. MSRB also requires that trade confirmations or other
                         documentation associated with primary market transactions provide
                         notice that primary offering disclosure information (official statements) is
                         available through EMMA. Further, MSRB developed an online education
                         center and in May 2012 launched an investor toolkit on its website. MSRB
                         staff told us they plan to develop focus groups of investors to explore
                         ways to improve EMMA, which could include how to improve investor
                         education efforts. Additionally, SEC, FINRA, and others have promoted
                         EMMA on various websites relevant to investors interested in purchasing
                         municipal securities.

Expand SEC Enforcement   Three of 21 market participant groups and 1 of 21 experts we surveyed,
Activities               and 3 market participant groups with whom we spoke suggested SEC
                         could expand its enforcement activities using its existing antifraud
                         authorities as leverage to improve issuers’ adherence with continuing
                         disclosure agreements. As discussed previously, SEC does not have the
                         authority to directly require issuers to submit continuing disclosure
                         information to EMMA. SEC enforcement actions using its antifraud
                         authority could encourage issuers to comply with their continuing
                         disclosure obligations. For example, one issuer we interviewed said he
                         was careful to comply with the continuing disclosure agreement, as he did
                         not want to risk the city becoming the subject of an SEC enforcement
                         action.

                         An expert and a market participant group we surveyed, and two market
                         participant groups we interviewed discussed the potential benefits of
                         increased enforcement activity. They said a few high-profile enforcement
                         actions could improve disclosure compliance. For example,
                         representatives of a national group that advises issuers on their
                         disclosures said enforcement actions and interpretive releases were their


                         Page 35                                          GAO-12-698 Municipal Securities
                           main sources of guidance for preparing or advising issuers about
                           disclosure information.

                           To be held liable under the antifraud provisions, issuers must make a
                           material misstatement or omission in their disclosures or public
                           statements (such as to EMMA or in a speech). 63 SEC has initiated
                           enforcement actions against state and local governments for materially
                           false and misleading disclosures they provided to investors in connection
                           with publicly offered municipal securities. For example, SEC found that
                           the State of New Jersey and the City of San Diego violated antifraud
                           provisions by misstating or omitting material information about the annual
                           funding of their pension obligations, which SEC alleged to be material
                           information on which investors would rely. 64 To strengthen enforcement
                           efforts in the municipal securities market, SEC created a municipal
                           securities and public pensions unit in its Division of Enforcement in
                           January 2010. Initial efforts by the division include identifying market
                           activities that pose the greatest risk to investors and identifying potential
                           violations.

Provide Guidance to Help   Six of 21 experts and 8 of 21 market participant groups we surveyed
Standardize Disclosure     suggested efforts by regulators to standardize disclosure information
                           could benefit investors by improving the content and readability of
                           disclosure. Their suggestions included that SEC establish disclosure
                           guidance on ways to standardize the organization of information or
                           highlight what information could be important according to the type of
                           security or credit sector. Additionally, an investor suggested regulators
                           develop a one-page template issuers could use to provide information
                           most pertinent to investors, in an easily understood format.

                           Three of 21 market participant groups we surveyed and a market
                           participant group and an investor with whom we spoke said additional



                           63
                              SEC staff told us that the antifraud provisions of the federal securities laws are broad,
                           and may be utilized against persons (including issuers, local officials, underwriters, and
                           financial advisors) in cases alleging fraudulent statements and omissions in offering
                           documents, annual financial information, other statements, or disclosures made by
                           municipal issuers, and, in some cases, public comments made by officials who make a
                           material misstatement or omission in their disclosures or public statements.
                           64
                             See In re New Jersey, Securities Act Release No. 9135 (Aug. 18, 2010); In re City of
                           San Diego, Securities Act Release No. 8751, Exchange Act Release No. 54,745 (Nov. 14,
                           2006).




                           Page 36                                                      GAO-12-698 Municipal Securities
                               guidance or templates could improve the readability and comparability of
                               information disclosed in EMMA, improving investors’ understanding of the
                               information. Additionally, an expert said such guidance, outlining broad
                               categories of basic information all issuers should provide, would be
                               particularly helpful to small or infrequent issuers that lack the resources
                               needed to maintain an awareness of industry changes in disclosure
                               standards. However, many large, small, and conduit issuers with whom
                               we spoke identified potential challenges to providing standardized
                               information. They said standardized formats could require different
                               information from what is collected and maintained now, requiring changes
                               that could impose additional costs on issuers through increased staff
                               time, hiring additional expertise, and associated opportunity costs. Also, 1
                               of 21 market participant groups we surveyed was concerned that direct
                               regulation of disclosure content and format by SEC or MSRB could have
                               an adverse effect on the quality of disclosure information. That is,
                               standardized information might provide investors with information that
                               was too general to be useful.

                               SEC staff said they have been exploring different ideas to assist
                               municipal issuers in improving disclosure as part of the staff’s ongoing
                               review of the municipal securities market. For example, SEC staff told us
                               SEC could consider having a role in helping issuers determine what types
                               of information would be useful for investors’ decision making. While
                               MSRB had not specifically discussed developing templates for disclosure
                               in its long-range plan for EMMA, staff told us MSRB could consider
                               possible options to help standardize disclosure using its authority over
                               how information gets submitted to EMMA. MSRB staff told us examples
                               could include creating a template for baseline disclosure such as an
                               online form for submitting information to EMMA, or providing guidance or
                               best practices to show patterns of good disclosure and highlight good
                               disclosure practices. Staff also suggested MSRB could consider
                               developing an online library of links to websites with guidance and best
                               practices developed by industry groups and regulators.

Require Use of Plain English   Three of 21 market participant groups and 1 of 21 experts we surveyed
                               suggested federal regulators should require issuers to use plain English
                               when preparing information for submission to EMMA. For example, they
                               suggested issuers use plain language to describe financial information or
                               the implications of event notices.

                               To some extent, issuers already have been following these practices.
                               Municipal issuers that satisfy their annual reporting obligation (agreed on
                               in their continuing disclosure agreement) by submitting an annual


                               Page 37                                          GAO-12-698 Municipal Securities
                          financial report prepared in accordance with GASB rules provide a
                          management discussion and analysis. 65 Additionally, four of seven large
                          issuers and three of seven conduit issuers with whom we spoke had
                          made efforts to incorporate plain language into their annual financial
                          reports and other financial information they posted to their websites. For
                          example, three of seven large issuers said using plain language was a
                          long-time goal. However, large, small, and conduit issuers with whom we
                          spoke said cost factors, including potential liability under SEC antifraud
                          authority, lack of internal expertise, and complex accounting standards,
                          have made it challenging to summarize or interpret the disclosure
                          information they provide in plain language. Because of these factors, one
                          large issuer told us investors should seek assistance from brokers or
                          financial advisors on interpreting financial disclosure information, rather
                          than relying on issuers to provide plain language or summary information.

                          MSRB staff told us it would be difficult to enforce a requirement that
                          information provided to EMMA use plain English, given the number and
                          diversity of municipal issuers. They said it would be easier to mandate
                          use of plain English if SEC had direct authority over municipal issuers.


MSRB and SEC Have Been    MSRB has taken recent actions to improve the timeliness of disclosure of
Taking Steps to Address   financial information, the frequency of disclosure, and the completeness
Some Options              of disclosure filings through improvements to EMMA with a focus on the
                          system’s functionality. Examples of recent improvements include the
                          following:

                          •   Filing date information—MSRB expanded the information underwriters
                              report at the time of an offering to include the date by which issuers
                              agree to provide annual financial information. This information is




                          65
                            GASB Statement 34 established financial reporting standards for state and local
                          governments and established that the basic financial statements and required
                          supplementary information for government entities should include a management
                          discussion and analysis. Among other things, the management discussion and analysis
                          should provide an analysis of the government’s overall financial position and results of
                          operations to assist users in assessing whether the government’s financial position had
                          improved or deteriorated as a result of the year’s activities.




                          Page 38                                                   GAO-12-698 Municipal Securities
     displayed in EMMA, making lapses in annual disclosure more
     transparent to users. 66
•    Voluntary information—MSRB also developed features in EMMA that
     allow issuers to submit different types of information on a voluntary
     basis, including monthly budget updates. Additional changes, which
     became effective May 2011, permit issuers, obligated persons, and
     parties providing disclosure on their behalf, to provide to EMMA
     additional categories of information including specifying a timeframe
     of 120 or 150 days for submitting annual financial information,
     indicating use of GAAP as established by GASB or Financial
     Accounting Standards Board (FASB), or providing a web address
     (URL) where additional financial information is available. 67 An issuer’s
     agreement to participate in any of these voluntary undertakings would
     be prominently displayed in EMMA.
•    Rating information—MSRB implemented a direct feed to EMMA of
     ratings information from two of the rating agencies that currently
     provide ratings on municipal securities. 68 According to MSRB, the
     rating agencies voluntarily provide ratings information to EMMA,
     which is updated automatically. Consequently, EMMA users who
     previously might not have been aware of rating changes affecting their
     securities could obtain timely and accurate information.
In addition to these recent efforts, in January 2012, MSRB issued its long-
range plan for further developing the EMMA system. 69 According to
MSRB’s long-range plan, planned improvements reflect suggestions
MSRB received from market participants and others through such venues
as industry roundtables, outreach events, targeted meetings, and



66
  MSRB staff told us that MSRB is prohibited under the Tower Amendment from reviewing
disclosure content. Although a recent rule change would enable EMMA users to determine
whether an issuer has submitted annual financial information in accordance with its
pledge, users determine whether the content of the disclosure is complete. See MSRB
Notice 2011-08 (Feb. 7, 2011).
67
  Issuers can indicate voluntary plans to submit to EMMA annual financial information
within 120 calendar days after the end of their fiscal year, or as a transitional alternative
through 2013, within 150 calendar days after the end of the applicable fiscal year.
68
  MSRB staff told us that MSRB has committed to providing ratings information on EMMA
from any nationally recognized statistical rating organization that rates municipal
securities, agrees to participate, and makes appropriate arrangements to do so.
69
  See MSRB, Long-Range Plan for Market Transparency Products (Jan. 27, 2012),
available at http://www.msrb.org/About-MSRB/Programs/Long-Range-Plan-for-Market-
Transparency-Products.aspx.




Page 39                                                       GAO-12-698 Municipal Securities
feedback through the EMMA website. MSRB’s long-range plan includes
improving search capabilities to make it easier for investors to find
securities. Planned changes would allow users to find specific securities
information using information other than CUSIP numbers, such as
keywords, map-based information, or hierarchy-based searches (for
example, securities within a given state), and would allow users to
conduct advanced searches within disclosure documents. The plan also
includes ongoing work with the issuer community to develop additional
tools and utilities to help issuers manage their debt portfolios and to
promote more comprehensive and timely disclosure. For example, MSRB
plans to develop more flexibility for issuers to manage disclosure
submissions and their appearance in EMMA. These new EMMA
capabilities could enable issuers to compare the disclosure and
performance of their securities with their peers’ securities. MSRB also
plans to continue promoting awareness of EMMA and provide additional
online education information for investors, including how to work with
advisors, access pricing information, and use EMMA.

SEC’s ongoing study of the state of the municipal securities market has
focused on a range of issues such as primary and secondary market
disclosure practices, financial reporting and accounting, investor
protection and education, and market structure (including pretrade price
transparency). 70 SEC staff told us one purpose of the study is to identify
risks in the market and what types of changes, if any, might be needed,
including changes in the quality and timeliness of disclosure information
provided to the market. SEC staff expect to release their staff report in
2012, and include legislative, regulatory, and industry best practices and
recommendations to SEC Commissioners for measures to improve
primary and secondary market disclosure practices, measures to improve
market practices, and associated regulation. In addition, the Dodd-Frank
Act required SEC to create an Office of Municipal Securities to administer
SEC rules for municipal securities brokers and dealers, advisors,
investors, and issuers, and to coordinate with MSRB on rulemaking and
enforcement actions. SEC has been in the process of hiring an Office of


70
  As part of its review, SEC facilitated three field hearings to gather perspectives on
issues facing the municipal securities market, held in-person meetings with some market
participant groups, and received public comments. SEC held field hearings in San
Francisco, California; Washington, D.C.; and Birmingham, Alabama. We previously
reported SEC had planned to hold more field hearings, but was unable to do so because
of budget constraints. See GAO-12-265. Instead, staff held a number of “mini muni”
meetings, with a variety of municipal securities market stakeholders at SEC’s offices.




Page 40                                                  GAO-12-698 Municipal Securities
                  Municipal Securities director and staff. SEC’s fiscal year 2012 budget
                  provides for five full-time staff; however, as of April 2012, the office had
                  three employees.


                  We provided a draft of this report to SEC, MSRB, and FINRA for
Agency Comments   comment. SEC and MSRB provided technical comments, which we
                  incorporated, as appropriate. FINRA did not provide comments on the
                  draft report.


                  We are sending copies of this report to the Senate Committee on
                  Banking, Housing, and Urban Affairs and the House Committee on
                  Financial Services. In addition, the report is available at no charge on the
                  GAO website at http://www.gao.gov.

                  If you or your staff have any questions about this report, please contact
                  me at (202) 512-8678 or clowersa@gao.gov. Contact points for our
                  Offices of Public Affairs and Congressional Relations may be found on
                  the last page of this report. GAO staff who made key contributions to this
                  report are listed in appendix V.




                  A. Nicole Clowers
                  Director
                  Financial Markets and Community Investment




                  Page 41                                            GAO-12-698 Municipal Securities
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              The objectives of this report were to (1) examine the extent to which
              information currently provided on municipal securities is useful and the
              extent to which existing regulation reflects principles for effective
              disclosure; and (2) identify options for improving the information issuers
              disclose to investors of municipal securities, and the related benefits and
              challenges of these options for investors and issuers.

              To describe the extent to which information is useful for investors, we
              reviewed documents from the Securities and Exchange Commission
              (SEC) and the Municipal Securities Rulemaking Board (MSRB), including
              rulemakings, studies, statistical reports, staff reports, and a plan that
              described various issues concerning municipal securities disclosure. We
              reviewed the transcripts of SEC hearings on the state of the municipal
              securities market held in San Francisco, California; Washington, D.C.;
              and Birmingham, Alabama, on various dates in 2010 and 2011. We also
              reviewed 45 comment letters submitted to SEC as of January 25, 2012,
              regarding its study of the municipal securities market. We conducted a
              case study of disclosure information that we obtained from MSRB’s
              Electronic Municipal Market Access (EMMA) system and made
              observations about EMMA’s ease of use, the completeness of the
              disclosed information, and the ease with which certain information could
              be found in the disclosures. As EMMA became the central repository for
              primary market and continuing disclosures in July 2009, we reviewed 14
              issuances that were offered between July and December 2009. The
              issuances reviewed included 2 issued by small governmental entities (a
              school district and a fire district), 2 issued by medium-sized governmental
              entities (a utility district and a city), and 2 issued by large governmental
              entities (a state and a city education board) for general-obligation debt
              issuances. One issuance was a general-obligation bond issued for a
              public hospital. The remaining 7 consisted of conduit issuances for a
              variety of projects, including an airport, solid waste facility, multifamily
              housing complex, stand-alone hospital, hospital system, continuing care
              retirement community, and nursing home. We also reviewed independent
              and academic studies on the usefulness of disclosure information and
              default studies from the three largest rating agencies as well as data on
              municipal securities defaults from an independent research firm to
              understand the risks to investors of municipal securities. We used data
              from Standard & Poor’s and Moody’s Investors Service to compare
              default rates for U.S. municipal issuers and global corporate issuers rated
              by each rating agency. We assessed the reliability of these data and
              found it to be reliable for this purpose. In addition, we worked through the
              American Association of Individual Investors to identify and interview 12
              retail investors with diverse investment experience with municipal


              Page 42                                          GAO-12-698 Municipal Securities
Appendix I: Objectives, Scope, and
Methodology




securities. We also interviewed institutional investors (including
representatives for eight investment companies), professional analysts, a
rating agency, an independent research firm, and groups representing
market participants, including broker-dealers, bond lawyers, and
municipal advisors. Finally, we interviewed staff of federal and state
regulators, including SEC, MSRB, the Financial Industry Regulatory
Authority (FINRA), and the North American Securities Administrators
Association.

To describe the extent to which the information that issuers must provide
reflects principles for effective disclosure, we reviewed federal laws and
rules, agency regulations, and interpretive guidance that set forth
disclosure requirements related to municipal securities. We reviewed
SEC Rule 15c2-12, the primary SEC rule relating to underwriters of
municipal securities. We reviewed information on SEC regulations for
insider trading and that establish fair disclosure requirements for
corporate securities to determine their applicability to municipal securities.
We also reviewed SEC’s antifraud authorities in the Securities Act of
1933 and the Securities Exchange Act of 1934, as well as provisions of
these acts that exempt municipal securities from SEC registration and
periodic reporting requirements. In addition, we reviewed MSRB’s facility
filing on EMMA, which establishes requirements for submitting disclosure
information to the system. We compared these requirements with
principles for effective disclosure and had two analysts review and come
to independent judgments to determine the extent to which disclosure
regulations reflected the principles. We used two sources for criteria.
First, we used Principles for Ongoing Disclosure and Material
Development Reporting by Listed Entities from the International
Organization of Securities Commissions. 1 We believed these principles to
be appropriate criteria for use in this context because our data collection
indicated that continuing disclosure was a key issue for municipal
securities disclosure. Although trading of municipal securities in the
secondary market is infrequent, trading volume is substantial, indicating
the importance of continuing disclosure. We did not use one of the
principles—simultaneous and identical disclosure—in our analysis
because the principle referred to making disclosures across borders,
which is not important for municipal securities because the market is



1
 International Organization of Securities Commissions, Principles for Ongoing Disclosure
and Material Development Reporting by Listed Entities (October 2002).




Page 43                                                  GAO-12-698 Municipal Securities
Appendix I: Objectives, Scope, and
Methodology




largely domestic and the securities do not trade on exchanges. Second,
we used SEC’s A Plain English Handbook: How to Create Clear SEC
Disclosure Documents, which sets forth principles for preparing
disclosure documents in easy-to-understand language. 2 We believed
these principles to be appropriate criteria for municipal securities
disclosure because our data collection indicated that readability was an
issue for investors and a national organization representing state and
local governments had suggested the principles to its members for
producing municipal securities disclosure documents.

To identify options for improving the information issuers disclose to
investors, we reviewed compliance and enforcement information from
SEC and FINRA, including examination manuals for Rule 15c2-12 and
MSRB Rule G-32, which set forth broker-dealer requirements for
disclosures in connection with primary offerings. We reviewed data on
examinations that found violations of the rule, and in certain cases,
reviewed examination reports. Furthermore, we surveyed experts and
groups representing issuers and other market participants, such as
municipal advisors, broker-dealers, and professional analysts. The
questions we asked experts focused on the regulation of municipal
securities disclosure, whereas the questions we asked market participant
groups focused on disclosure practices. This is because our initial
interviews with market participant groups illuminated conflicts of interest
that made it challenging to discuss options for regulating municipal
securities disclosure. We recruited experts with career expertise in the
municipal securities market and without obvious conflicts of interest,
which we defined as the potential to benefit personally or professionally
from the outcomes of our study or with a constituent they might feel the
need to satisfy. Surveys for both groups asked for options to improve
disclosure. We used a nonprobability sampling method to identify and
select experts by obtaining referrals from other market participants,
experts, and regulators. Although our results are not generalizable, our
survey covered a diverse group of experts and market participant groups
with broad and differing perspectives. We administered the survey to 26
experts and 29 market participant groups and received responses from
21 experts and 21 groups. We analyzed options according to what was
mentioned most frequently and excluded suggestions that were not based



2
 SEC, A Plain English Handbook: How to Create Clear SEC Disclosure Documents
(Washington, D.C.: August 1998).




Page 44                                              GAO-12-698 Municipal Securities
Appendix I: Objectives, Scope, and
Methodology




on a correct understanding of the existing disclosure regime or were
beyond the scope of our review. To control for small variations across the
suggestions, three analysts reviewed and came to independent
judgments to assign suggestions into various categories. To identify the
types of benefits and challenges related to suggested options, we
interviewed 20 issuers in three groups representing (1) large and frequent
issuers, (2) small and infrequent issuers, and (3) conduit issuers. The
group consisting of large and frequent issuers included representatives of
three states, three large cities, and a county. The group of small and
infrequent issuers included representatives of five cities and a county with
populations of 500,000 or fewer. The group of conduit issuers included
representatives of three state housing finance agencies, three state
health and educational facilities agencies, and a state bond bank. The
issuers were geographically diverse, and represented entities from:
California, Colorado, Florida, Georgia, Kansas, Maine, Maryland,
Minnesota, New York, Oregon, Pennsylvania, Rhode Island, South
Carolina, Tennessee, Texas, Washington, and Wisconsin. We also drew
on information obtained from our survey and other interviews we
conducted with investors, regulators, and market participants.

We conducted this performance audit from June 2011 to July 2012 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




Page 45                                          GAO-12-698 Municipal Securities
Appendix II: Key Federal Disclosure
                                           Appendix II: Key Federal Disclosure
                                           Requirements for Publicly Offered Municipal
                                           and Corporate Securities


Requirements for Publicly Offered Municipal
and Corporate Securities
                                           Table 2 compares key federal disclosure requirements for municipal and
                                           corporate securities. The information in the table is organized according
                                           to whether requirements apply to primary or secondary market disclosure,
                                           with requirements that apply to both presented first.

Table 2: Comparison of Key Federal Disclosure Requirements for Publicly Offered Municipal and Corporate Securities, as of
June 2012

Key federal disclosure
requirement                  Municipal                                              Corporate
Applicability of antifraud   Yes                                                    Yes
           a
provisions                   SEC is authorized to take enforcement actions          SEC is authorized to take enforcement actions
                             against any person or entity that violates antifraud   against any person or entity that violates antifraud
                             provisions.                                            provisions.
Use of generally accepted    No                                                     Yes
accounting principles        Issuers are not required to prepare financial          SEC requires U.S. public companies to prepare
                             statements according to generally accepted             financial statements according to GAAP. SEC
                             accounting principles (GAAP). There are no             designated FASB as the GAAP standard setter for
                             requirements covering the preparation of financial     corporate filers.
                             statements.                                            Auditors must conduct audits in accordance with
                             Nevertheless, we previously reported that all states   the standards of the Public Company Accounting
                                                                        b
                             use GAAP for annual financial statements.              Oversight Board.
                             Utilization varies among local governments, where
                             cash-basis accounting also is used. Governmental
                             Accounting Standards Board (GASB) establishes
                             GAAP for state and local governments.c,d
                             Corporate and nonprofit obligated persons may use
                             GAAP set by the Financial Accounting Standards
                             Board (FASB).




                                           Page 46                                                      GAO-12-698 Municipal Securities
                                       Appendix II: Key Federal Disclosure
                                       Requirements for Publicly Offered Municipal
                                       and Corporate Securities




Key federal disclosure
requirement              Municipal                                                Corporate
Regulatory review        No                                                       Yes
                         SEC is not authorized to require municipal issuers       SEC staff may review a company’s filings for
                         to file presale information with SEC prior to the sale   various purposes. SEC reviews some registration
                         of municipal securities.                                 statements and declares them “effective” if the
                                                                                  company satisfies disclosure rules, at which time
                                                                                  the company may begin to sell its securities.
                                                                                  Sometimes, SEC staff do not review registration
                                                                                  statements and declare them effective. Some
                                                                                  registration statements are effective automatically.
                                                                                  SEC staff selectively review filings, including
                                                                                  periodic reports, and provide the company with
                                                                                  comments in instances where they believe a
                                                                                  company can improve its disclosure or enhance
                                                                                  its compliance with applicable disclosure
                                                                                  requirements. SEC staff view the comment
                                                                                  process as a dialogue with a company about its
                                                                                  disclosure.
                                                                                  The Sarbanes-Oxley Act of 2002 requires SEC to
                                                                                  undertake some type of review of a public
                                                                                  reporting company’s ongoing disclosure once
                                                                                  every 3 years for compliance, and SEC may take
                                                                                  enforcement actions.
Disclosure repository    Yes                                                      Yes
                         MSRB maintains EMMA (Electronic Municipal                SEC maintains EDGAR (Electronic Data
                         Markets Access), an online repository for                Gathering Analysis and Retrieval), an online
                         disclosures.                                             repository for disclosures.
Exemptions               Yes                                                      Yes
                         The following types of municipal securities offerings    Federal securities laws provide various
                         are exempt, in whole or in part, from Rule 15c2-12       exemptions from registration for the following
                         if one or more of the following conditions are met:e     securities or transactions:
                         •    principal amount is less than $1 million;           •    offered and sold to residents of one state;
                         •    maturity is 18 months or less; or                   •    private offerings; or
                         •    the securities are sold in denominations of         •    sold through employee benefit plans.
                              $100,000 or more and meet standards for             A public reporting company may terminate its
                              limited distribution.                               periodic reporting obligations based on number of
                         There is a limited exemption from Rule 15c2-12 for       shareholders and asset value, or such obligation
                         offerings of municipal securities of issuers with less   may be statutorily suspended.
                         than $10 million in outstanding municipal securities.
SEC registration         No                                                       Yes
                         The Securities Act of 1933 exempts municipal             Offers and sales of securities must be registered
                         securities from registration requirements.               under the Securities Act of 1933 unless an
                                                                                  exemption is available.




                                       Page 47                                                       GAO-12-698 Municipal Securities
                                          Appendix II: Key Federal Disclosure
                                          Requirements for Publicly Offered Municipal
                                          and Corporate Securities




Key federal disclosure
requirement                 Municipal                                              Corporate
Primary offering            Yes                                                    Yes
disclosure                  For offerings subject to Rule 15c2-12, the rule        For registered offerings of securities, SEC’s
                            requires underwriters to obtain and review an          requirements include a registration statement and
                            official statement consisting of information about     prospectus consisting of information about the
                            the terms of the proposed offering, financial and      issuer, including financial information, the terms of
                            operating data that is material to an evaluation of    the proposed offering, the most significant risk
                            the offering, a description of the continuing          factors affecting the issuer, and the interests of
                            disclosure undertaking to which the issuer agreed,     experts or counsel that advised the issuer, among
                            and information on any failure to comply with any      other things.
                            continuing disclosure undertaking in the previous 5    There are securities offerings that are exempt
                            years.                                                 from registration and therefore exempt from such
                            Obligation to provide primary offering disclosure to   disclosure requirements.
                            investors is on the underwriter.                       The issuer is obligated to provide primary offering
                                                                                   disclosure.
Continuing or secondary     Limited                                                Yes
market disclosure content   Rule 15c2-12 requires, as a condition to               SEC requires public reporting companies to
requirement                 underwriting, an underwriter to reasonably             submit annual audited financial statements and
                            determine that an issuer or obligated person has       unaudited quarterly financial statements. SEC
                            agreed in writing at offering to provide ongoing       also requires public reporting companies to file
                            notices of certain events and annual financial         notices of certain current specified events.
                            information and operating data.f
                            Agreements are enforceable only by bondholders
                            and other parties to or beneficiaries of the
                            agreement, if any. SEC cannot enforce the terms of
                            the agreement.g
                            The underwriter’s ability to engage in subsequent
                            offerings is affected by whether the issuer has
                            complied with their continuing disclosure
                            agreements for prior undertakings. The underwriter
                            must reasonably determine that the issuer has
                            agreed to provide certain ongoing disclosure and
                            disclose in the official statement compliance
                            failures with previous undertakings for the previous
                            5 years.
Secondary market            Limited                                                Yes
disclosure format           MSRB requires EMMA submissions in portable             SEC requires that information filed on EDGAR to
requirement                 document format and to be accompanied by certain       be in plain text or HTML. SEC requires most filers
                            indexing information.                                  to submit data in an interactive format, XBRL.
                                                                                   SEC provides detailed written guidance on the
                                                                                   form and content for various filing requirements.




                                          Page 48                                                      GAO-12-698 Municipal Securities
                                       Appendix II: Key Federal Disclosure
                                       Requirements for Publicly Offered Municipal
                                       and Corporate Securities




Key federal disclosure
requirement              Municipal                                                           Corporate
Secondary market         Limited                                                             Yes
disclosure timing        There is no federal requirement to provide annual                   Annual financial information must be filed within
requirement              financial information within a certain time frame                   45, 60, or 90 days after the end of the fiscal year,
                         after the end of the fiscal year. Rule 15c2-12,                     depending on the type of issuer.
                         however, requires that the date be specified in the                 Quarterly financial information must be filed within
                         written undertaking of the issuer or other obligated                45 days after the end of the quarter.
                         person.
                                                                                             Current event notices must be filed within 4
                         SEC Rule 15c2-12 requires continuing disclosure                     business days of the event date.
                         agreements to include the provision of certain
                         event notices within 10 business days of the date of
                         occurrence; however, the terms of continuing
                         disclosure agreements are unenforceable by SEC.
                                       Source: GAO summary of SEC and MSRB policies, rules, and regulations.
                                       a
                                        SEC has authority to enforce statutory provisions and rules that prevent fraud in connection with the
                                       offer, purchase, and sale of securities. SEC may hold issuers and others responsible for
                                       misstatements or omissions of material information from disclosure.
                                       b
                                        See GAO, Dodd-Frank Wall Street Reform Act: Role of the Governmental Accounting Standards
                                       Board in the Municipal Securities Markets and Its Past Funding, GAO-11-267R (Washington, D.C.:
                                       Jan. 18, 2011).
                                       c
                                        GASB was established in 1984 as an operating component of the Financial Accounting Foundation.
                                       GASB is recognized by the American Institute of Certified Public Accountants as the body that
                                       establishes GAAP for state and local governments.
                                       d
                                        We previously reported on the role and relevance of GASB in the municipal securities markets.
                                       Stakeholders with whom we spoke found GAAP-basis financial statements to be highly useful for
                                       assessing the quality of municipal securities compared with other bases of accounting. Examples of
                                       utility that they cited included that GAAP-basis statements provided important information on topics
                                       such as pensions and postemployment benefit plans, and that the management discussion and
                                       analysis section and enhanced disclosures in the notes sections provided context on an issuer’s
                                       financial position. However, views on the pension information (in particular, the appropriate way to
                                       measure and accrue cost for these obligations) have become widely divergent. In addition, GAAP-
                                       basis financial statements are complex and expensive to prepare and governments are not always
                                       timely in issuing audited financial statements. See GAO-11-267R. In 2009, GASB issued an invitation
                                       to comment on pension accounting issues, followed by a preliminary views document in 2010, and
                                       two exposure drafts of proposed revised pension accounting standards in 2011. GASB approved its
                                       revised pension accounting standards in June 2012. The new standards apply to financial reports of
                                       pension plans for reporting periods beginning after June 15, 2013, and to government accounting and
                                       disclosure of pension information for fiscal years beginning after June 15, 2014.
                                       e
                                           SEC Rule 15c2-12 establishes requirements applicable to underwriters of municipal securities.
                                       f
                                        An obligated person is any person, including an issuer of municipal securities, who is committed by
                                       contract or other arrangement to support payment of the obligations on the municipal securities to be
                                       sold in an offering. Municipal securities may be issued by a governmental issuer acting as a conduit
                                       for the benefit of a private-sector entity or a nonprofit organization. Much of the disclosure for these
                                       securities pertains to and is provided by the obligated person. Examples of such obligated persons
                                       include not-for-profit hospitals, multifamily housing developers, lessees of airport and port facilities,
                                       and companies and persons that are the recipients of the proceeds of municipal securities issued for
                                       industrial or economic development projects.
                                       g
                                        Antifraud provisions of the Securities Act of 1933 and Securities Exchange Act of 1934 prohibit the
                                       omission or misrepresentation of material facts in connection with the offer, purchase, or sale of any
                                       security, including a municipal security. SEC has used the antifraud provisions to bring enforcement
                                       actions against issuers that misrepresented their pension liability in official statements (which also
                                       may be looked to as secondary market disclosure for previously issued securities).




                                       Page 49                                                                   GAO-12-698 Municipal Securities
Appendix III: Principles of Effective Disclosure
                                             Appendix III: Principles of Effective Disclosure
                                             Compared with Current Disclosure
                                             Regulations for Municipal Securities


Compared with Current Disclosure Regulations
for Municipal Securities
                                             We compared requirements for continuing disclosure in the Securities
                                             and Exchange Commission’s (SEC) Rule 15c2-12 and SEC’s antifraud
                                             authorities with principles for effective disclosure that were developed by
                                             an international organization of securities commissions, which included
                                             SEC, and certain plain English principles developed by SEC. 1 We found
                                             that the current municipal securities disclosure requirements broadly
                                             reflect the seven principles for effective disclosure.

Table 3: Principles of Effective Disclosure Compared with Current Disclosure Regulations for Municipal Securities

Principle                                                  Is this principle reflected in regulation?
Allocation of accountability                               Yes
The issuer or obligated person is responsible for          SEC Rule 15c2-12 requires, as a condition of an underwriting, that an
compliance with the continuing disclosure obligation.      underwriter must reasonably determine that an issuer or obligated person, if
                                                           any, has agreed to undertake for the benefit of bondholders to provide annual
                                                           and event information over the lifetime of the security. Federal regulators do
                                                           not have the explicit and affirmative authority to require issuers to comply with
                                                           this aspect of the agreement. However, security holders may enforce the
                                                           terms of the agreement through bringing suit against the issuer or obligated
                                                           person.
Continuing disclosure obligation                           Yes
Issuers or obligated persons should have a continuing      SEC Rule 15c2-12 requires, as a condition of an underwriting, that an
disclosure obligation requiring disclosure of all          underwriter must reasonably determine that an issuer or obligated person, if
information that would be material to an investors’        any, has agreed to undertake for the benefit of bondholders to provide annual
investment decision.                                       and event information over the lifetime of the security.
Disclosure criteria                                        Yes
Continuing disclosure of information should be fairly      SEC’s antifraud provisions apply to municipal securities and participants in
presented, not be misleading or deceptive, and contain     the municipal securities market. SEC has used its antifraud authority to take
no material omission of information.                       enforcement actions against municipal issuers for disclosing misleading
                                                           information about the size of pension obligations.
Dissemination of information                               Yes
Under the continuing disclosure obligation, issuers or     SEC Rule 15c2-12 requires, as a condition to an underwriting, an underwriter
obligated persons should ensure that full information is   must reasonably determine that an issuer or obligated person has undertaken
promptly made available to the market by using             to provide disclosure information on EMMA, which allows for prompt
efficient, effective, and timely means of dissemination.   submission to the market.




                                             1
                                              See International Organization of Securities Commissions, Principles for Ongoing
                                             Disclosure and Material Development Reporting by Listed Entities (October 2002). See
                                             also SEC, A Plain English Handbook: How to Create Clear SEC Disclosure Documents
                                             (Washington, D.C.: August 1998). While municipal issuers are not required to follow these
                                             principles, we believe the International Organization of Securities Commissions criteria are
                                             relevant because our data collection indicated that continuing disclosure was a key issue
                                             for municipal securities disclosure. Although trading of municipal securities in the
                                             secondary market is infrequent, trading volume is substantial, indicating the importance of
                                             continuing disclosure.




                                             Page 50                                                       GAO-12-698 Municipal Securities
                                              Appendix III: Principles of Effective Disclosure
                                              Compared with Current Disclosure
                                              Regulations for Municipal Securities




Principle                                                      Is this principle reflected in regulation?
Equal treatment of disclosure                                  Yes
The information to be disclosed in compliance with the         Although no federal regulation specifically requires that all disclosure
continuing disclosure obligation should not be                 information for municipal securities be shared evenly with all investors,
disclosed to selected investors or other interested            municipal securities, like other securities, are subject to SEC insider trading
parties before it is released to the public. Narrow            restrictions. Also, SEC Rule 15c2-12 requires, as a condition to an
exceptions include advisors and rating agencies.               underwriting, an underwriter must reasonably determine that an issuer or
                                                               obligated person has undertaken to provide disclosure information on EMMA,
                                                               which helps ensure equal access to information.
Timeliness                                                     Partial
Issuers or obligated persons should disclose ongoing           SEC Rule 15c2-12 requires that as a condition of an underwriting, an
information on a timely basis, including:                      underwriter must reasonably determine that an issuer or obligated person, if
•    prompt disclosure of material developments, and           any, has agreed to provide notices of certain events within 10 business days
                                                               and to specify the date on which the annual financial information for the
•    annual information.                                       preceding year will be provided. Although the rule requires that a date be
                                                               specified in the undertaking for the filing of the annual financial information, it
                                                               does not specify how long after the end of the fiscal year that date should be.
Use of plain English in official statements                    No
Official statements should:                                    There are no regulations requiring the use of plain English in official
•    use short sentences whenever possible,                    statements, although some industry guidance recommends this practice.
•    use tables or bulleted lists (to present complex
     information) whenever possible,
•    use descriptive headings and subheadings,
•    avoid frequent use of defined terms (including
     acronyms and shortened names),and
•    avoid legal and highly technical business
     terminology.
                                              Source: GAO summary of disclosure requirements for municipal securities.

                                              Note: We compared the regulation of disclosure against principles for effective disclosure derived
                                              from two sources: International Organization of Securities Commissions, Principles for Ongoing
                                              Disclosure and Material Development Reporting by Listed Entities (October 2002) and SEC, A Plain
                                              English Handbook: How to Create Clear SEC Disclosure Documents (Washington, D.C.: August
                                              1998). We determined that one International Organization of Securities Commissions principle,
                                              simultaneous and identical disclosure, was not relevant to the U.S. municipal securities market
                                              because these securities are not listed, but traded over-the-counter, and investors predominantly are
                                              in the United States. Thus, the concept of listing in multiple jurisdictions largely does not apply.




                                              Page 51                                                                    GAO-12-698 Municipal Securities
Appendix IV: Pension Liability Reporting
               Appendix IV: Pension Liability Reporting




               Investors, a market participant group, and an expert told us that the
               reporting of pension liability in municipal securities disclosure documents
               could be improved with changes to accounting standards and financial
               reporting requirements. For example, several investors told us that
               Governmental Accounting Standards Board (GASB) standards, to the
               extent issuers adopted them, did not provide for reporting enough
               information, such as financial projections, that could help users determine
               whether an entity will have sufficient resources to cover future financial
               obligations. Consequently, there are concerns that future pension costs
               could crowd out an entity’s ability to meet scheduled principal and interest
               payments on its municipal securities.

               GASB and the National Association of Bond Lawyers have undertaken
               various efforts that could increase the amount of information reported on
               pension and other long-term liabilities, but the viability of certain
               proposals already has been questioned, and it is too early to determine
               how issuers will react to recent guidance produced by an industry
               coalition.

               •   In November 2011, GASB issued suggestions for broadening the
                   information governmental entities report in annual financial reports to
                   include projections of cash flow and long-term financial obligations
                   (that is, bonds, pensions, other postemployment benefits, and long-
                   term contracts) for a minimum of 5 years beyond the reporting
                   period. 1 GASB issued these suggestions for public comment and
                   anticipated that respondents could be sharply divided on the issue.
                   Two of the seven board members did not agree with the suggestions.
                   They said forward-looking financial information would be subjective,
                   and they questioned the potential costs and benefits to governmental
                   entities of preparing the information. They had concerns that the
                   proposed suggestions could affect the timeliness of audited financial
                   statements and some entities’ willingness to report statements




               1
                GASB, Preliminary Views of the Governmental Accounting Standards Board on Major
               Issues Related to Economic Condition Reporting: Financial Projections, No. 13-3 (Nov.
               29, 2011).




               Page 52                                                  GAO-12-698 Municipal Securities
Appendix IV: Pension Liability Reporting




    compliant with generally accepted accounting principles, or GAAP (for
    those entities that can choose whether to comply with GAAP). 2
•   In May 2012, the National Association of Bond Lawyers issued
    guidance to help issuers provide disclosures about their pension
    funding in primary offering documents, or official statements. 3 The
    guidance was approved by a group of 12 national organizations
    representing municipal securities issuers, underwriters, analysts,
    institutional investors, accountants, actuaries, and others. The
    Government Finance Officers Association, which has produced
    disclosure guidance for its diverse membership of governmental
    issuers, has indicated it plans to approve best practices based on this
    guidance by October 2012. However, it is too early to determine what
    the best practices would encompass or the extent to which issuers
    would adopt them.
•   In June 2012, GASB approved standards that amend accounting and
    financial reporting on pension plans. 4 Among other changes, these
    standards made more uniform the methodology used to calculate
    pension liabilities and costs, require governments to recognize their
    net pension liability on the balance sheet for the first time, and provide
    additional historical information about pension funding status. GASB
    believes the new standards will result in a more faithful representation
    of the full impact of pension obligations. We reviewed selected
    comment letters submitted to GASB regarding its proposals to revise
    its pension accounting standards, issued 1 year earlier in June 2011,
    and found that views on the pension information (in particular, the



2
 These board members suggested alternatives, including broadening standards for
reporting historical information and information about how to obtain the subsequent year’s
budget. They said this information could provide an indication of the future of a
governmental entity and that historical data help users to make conclusions about a
government’s ability to continue to provide its current level of service.
3
 National Association of Bond Lawyers, Considerations in Preparing Disclosure in Official
Statements Regarding an Issuer’s Pension Funding Obligations, (May 15, 2012).
Available at
http://www.nabl.org/uploads/cms/documents/pension_funding_obligations_document_5-
18-12_b.pdf, as of May 18, 2012.
4
  The revised standards, approved as Statements 67 and 68, replaced previous pension
plan reporting standards (Statements 25, 27, and 50). Specifically, Statement 67 revised
guidance for the financial reports of most pension plans, effective for periods beginning
after June 15, 2013, and Statement 68 established new financial reporting requirements
for most governments that provide their employees with pension benefits, effective for
fiscal years beginning after June 15, 2014.




Page 53                                                   GAO-12-698 Municipal Securities
Appendix IV: Pension Liability Reporting




    appropriate way to measure and accrue cost for these obligations)
    had become widely divergent. 5




5
 See GASB, Accounting and Financial Reporting for Pensions: An Amendment of GASB
Statement No. 27, No. 34-E (June 27, 2011) and Financial Reporting for Pension Plans:
An Amendment of GASB Statement No. 25, No. 34-P (June 27, 2011).




Page 54                                                 GAO-12-698 Municipal Securities
Appendix V: GAO Contact and Staff
                  Appendix V: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov
GAO Contact
                  In addition to the contact named above, Karen Tremba, Assistant
Staff             Director; Heather Chartier; William R. Chatlos; Rachel DeMarcus; Melissa
Acknowledgments   Kornblau; Courtney LaFountain; G. Michael Mikota; Patricia Moye; Alise
                  Nacson; Barbara Roesmann; and Kathryn Supinski made key
                  contributions to this report.




(250616)
                  Page 55                                       GAO-12-698 Municipal Securities
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