Good afternoon, everyone:

I want to close out by thanking all our panelists and moderators for their time and effort and to everyone involved with putting on our compliance program this year. A lot of very important information was covered, and I hope it was helpful for everyone watching.

As is customary, my comments today are provided in my official capacity as Director of the Office of Municipal Securities, but do not necessarily reflect the views of the Commission, the Commissioners, or members of the staff.

***

I want to begin where we just left off, as an important part of the day was the panel we just heard on our regulatory outlook and exam and enforcement priorities. And, I want to build off that by talking about some of our priorities from a policy perspective.

I am very concerned with the types of deals we are seeing emerge now that issuance is low, and I want to remind regulated entities of the guardrails that are in place to address that issue. I would suggest that for municipal advisors your fiduciary duty should start with the question of whether this financing even needs to be done. And, I would like to do that by discussing the Commission’s recent settlement In the Matter of Fieldman Rolapp & Associates, Inc.[1] If you are not familiar, I suggest you review it because it concerns a breach of the duty of care by a registered municipal advisor and one of its principals.[2] For purposes of guidance, municipal advisors should be aware that it is not acceptable to advise an issuer to borrow when there is not a reasonable basis for the issuer to borrow.[3] This is especially true when the recommendation to borrow is based on inaccurate or misleading information. Although that case involved flawed assumptions in the model used for cost analyses of funding options presented –what could be even more concerning is not presenting issuers with any such analysis at all.

Recently, the market has also seen the emergence and reemergence of certain deal structures including housing deals for essential workers and students as well as taxable forward refundings and tenders that have come under scrutiny because of questionable economics or other issues.[4] We have seen certain municipal entities cede authority for issuing conduit bonds to privately-run entities that are the leading issuers of defaulted bonds.[5] When we see deal structures and arrangements like this, it is questionable whether the appropriate gatekeepers (including MAs, BDS and attorneys) are fulfilling their responsibilities. As municipal advisors, you owe your clients a fiduciary duty.[6] Similarly, for broker-dealers, MSRB Rule G-17 (fair dealing) sets out specific requirements that an underwriter must follow when communicating to and working with a municipal issuer on a new issuance.[7] And, none of these concepts are new. Dodd Frank[8] was passed almost 13 years ago, the G-17 disclosure requirements are from 2012, and the municipal advisor rule was adopted 10 years ago.[9]

Similarly, we are concerned about the number of municipal entities choosing to do negotiated sales when the vast body of research suggests that competitive sales are more efficient for the issuer in the majority of transactions.[10] Again, it would appear that municipal advisors are failing to provide appropriate information to issuers before they make that choice about what method of sale to use. Municipal advisors may claim that a deal comes to them where this decision is already made but a non-binding agreement to do a negotiated sale does not absolve a municipal advisor of its fiduciary duty to explore and present alternatives. What we have seen is that negotiated sales consistently deliver inferior pricing and higher costs to both issuers and retail investors. We will continue to focus on price movement and trading immediately after issuance in negotiated sales and remind municipal advisors of their regulatory responsibilities with respect to pricing and which could include monitoring post-issuance sales activity for example if agreed to or accepted through course of conduct.[11] Similarly, we will continue to closely watch the activities of broker-dealers – including whether they are properly disclosing conflicts of interest with respect to secondary market sales to affiliates and other related activity that may suggest flipping or similar violations. These concerns are currently perhaps even more pronounced in bond remarketings, where the MSRB’s rules for customers apply because most remarketings do not constitute a primary issuance of bonds.[12] Broker-dealers who act as remarketing agents cannot price bonds for their own convenience at the expense of municipal issuers. Their contracts should reflect applicable responsibilities and should not create the misimpression that remarketing prices are set, e.g., at the sole and absolute discretion of the remarketing agent, without consideration of applicable SEC and MSRB rules.

Another area of concern that was discussed today was municipal advisor activity conducted by persons and entities who failed to register. Since the municipal advisor rule was finalized 10 years ago, it appears that many entities (regulated and unregulated) have lost sight of the scope of activity the rule was designed to regulate.[13] So, I am just going to read it out to be clear: Pursuant to Exchange Act Sections 15B(e)(4)(A)(i) and (ii), municipal advisory activities include:

1. providing 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. the undertaking of a solicitation of a municipal entity.

In addition to the issues discussed today with respect to regulated entities, we are concerned about unregistered entities engaging in municipal advisory activity. We have noticed that these unregulated entities sometimes include P3 advisors and other participants in the P3 space. We encourage state and local governments who issue RFPs for P3 projects to ensure that the entities that respond to such RFPs are properly registered as municipal advisors, if and as required. We are also concerned about unregistered activity by attorneys (particularly in private placements), non-bank participants in lease financings and private placements, charter school advisors, special tax consultants, vendors who embed financing into their equipment sales to municipal entities, and state and local associations of governments that promote for compensation certain financing packages—especially if they include designated underwriters and municipal advisors.[14] If you are engaging in municipal advisory activities,[15] absent an exemption or exception from registration, you need to be registered with the Commission pursuant to the municipal advisor rule.[16]

We also appreciate the discussion regarding regulatory clarity and the specific concerns of small, regulated entities. I have long been a fan of the MSRB’s retrospective rule review and continue to believe that simplifying and streamlining rules and guidance will engender greater compliance. We appreciate the comments made today on all panels in that regard. We also suggest frequent reviews of OMS’s (sec.gov/municipal), MSRB’s, and FINRA’s websites for regulatory and compliance information and helpful updates. OMS frequently updates its FAQs and market participants can find a lot of helpful information there.

On that note, and although we think these things should now be automatic after 10 years, I want to remind you that staff actively reviews all municipal advisor Form MA filings to ensure all filings are current and complete.[17] In 2022, staff began a courtesy process of voluntarily notifying municipal advisors of delinquencies and also voluntarily reminding municipal advisors to file annual amendments within 90-days of the end of the fiscal or calendar year and material amendments promptly.[18] The Commission also cancels municipal advisor registrations when it appears the municipal advisors is no longer actively engaged in activity, and we do this by reviewing all municipal advisor MSRB and SEC filings for inactivity.[19] We also expect that municipal advisors will have written supervisory procedures in place,[20] that individuals engaged in municipal advisory activity have passed the Series 50 exam and have a current MA-I filed,[21] and that all entities, even solo practitioners, will have a supervisor that has passed the Series 54.[22] We also expect to see written agreements/contracts between the municipal advisor and their clients that spell out payments and conflicts of interest.[23] Importantly, if as a municipal advisor your fee is contingent or based on a percentage of the deal, you must disclose that in writing to your client under MSRB Rule G-42(b) for purposes of your disclosures of conflicts of interest.[24] Again, we are 10 years since the passage of the municipal advisor rule and such items are low hanging compliance areas.

And, just to end on a quick deviation from the main topic to something that was not discussed here today but that is no less relevant: municipal securities disclosure and guidance resources.[25] In that vein, I want to mention that the Commission recently finalized its cybersecurity rule for public companies subject to Exchange Act reporting,[26] and I suggest everyone take a minute to review the Adopting Release[27] for the rule because there are some good points on how corporations can handle cybersecurity disclosures that may be useful for municipal market participants.

Another disclosure topic that has been top of mind for municipal market participants is climate-related events and other environmental, social, and governance issues. The GFOA[28] has useful environmental disclosure best practice recommendations available, which suggests issuers should discuss environmental disclosure with bond counsel, disclosure counsel, and municipal advisors.[29] It’s important to remember that anti-fraud liability can include many members of the deal team. With that, I think this forum provides a good opportunity to remind issuers, municipal advisors, broker-dealers, and other municipal market participants of the importance of ensuring complete, fair, and accurate disclosure, including with respect to these topics. Environmental, social, or governance risks and their impacts or mitigation efforts can rise to the level of materiality, and municipal advisors and broker-dealers serve a role in making sure disclosures are made. Broker-dealer due diligence obligations are well-known[30] but it is also worth remembering that when municipal advisors agree to assist or assist in the preparation or review of disclosure documents,^[31] such activities become subject to the municipal advisor’s statutory fiduciary duty.^[32] Just as an example, if an issuer is going to market on a general obligation secured entirely by a tax pledge of property that is 99.9% in a 100-year flood zone with a high likelihood of significant flood damage before the end of a bond term and the offering document does not include any reference to flood risk, there may be an anti-fraud issue.[33] Credit rating agencies also can play a role in this area by properly considering climate risks that may lead to potential default when evaluating credits.

Again, thank you again to the SEC staff at OCR, Exams, Enforcement, and OMS, as well as to our partners at FINRA and MSRB, and our municipal market participants for putting this together and thank you for watching. I look forward to doing it again next year in person in Chicago in September 2024.