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United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

July 2012: 

Municipal Securities: 

Options for Improving Continuing Disclosure: 

GAO-12-698: 

GAO Highlights: 

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

Why GAO Did This Study: 

Municipal securities are debt instruments that state and local 
governments issue to finance diverse public projects. As of March 31, 
2012, individual investors held up to 75 percent of the total value of 
municipal securities outstanding. These securities are exempt from 
certain federal disclosure requirements applicable to other securities 
sold publicly. Disclosure provided in the primary market, where these 
securities are issued, generally consists of official statements. 
Continuing disclosure is information provided in the secondary market, 
where these securities are bought and sold after issuance. The Dodd-
Frank Wall Street Reform and Consumer Protection Act required GAO to 
review the information issuers of municipal securities must disclose 
for the benefit of investors. 

This report addresses (1) the extent to which information currently 
provided on municipal securities is useful for investors and the 
extent to which existing regulations reflect principles for effective 
disclosure, and (2) options for improving the information issuers 
disclose to investors of municipal securities. To conduct this work, 
GAO reviewed disclosure rules and compared them with principles for 
effective disclosure cited by SEC and the International Organization 
of Securities Commissions, surveyed selected experts and market 
participants, and interviewed issuers. 

GAO provided a draft of this report to SEC, MSRB, and the Financial 
Industry Regulatory Authority (FINRA). SEC and MSRB provided technical 
comments, which GAO incorporated, as appropriate. FINRA did not 
provide comments. 

What GAO Found: 

Market participants indicated that primary market disclosure for 
municipal securities-—official statements—-generally provides useful 
information, but investors and market participants cited a number of 
limitations to continuing disclosures. The most frequently cited 
limitations were timeliness, frequency, and completeness. For example, 
investors and other market participants said that issuers do not 
always provide all the financial information, event notices, or other 
information they pledged to provide for the lifetime of a security. 
While GAO's analysis of current regulatory requirements for municipal 
securities disclosure found that they largely reflected the seven 
principles of effective disclosure, regulators and market participants 
said that there are some limitations on the enforceability and 
efficiency of the regulations. However, the effect of these 
limitations on individual investors largely is unknown because limited 
information exists about the extent to which individual investors use 
disclosures to make investment decisions. Nevertheless, regulators 
remain concerned about this market, in part due to its size and the 
participation of individual investors. As discussed below, the 
Securities and Exchange Commission (SEC) and Municipal Securities 
Rulemaking Board (MSRB) have been taking or plan to take actions to 
improve disclosure. 

Experts and market participant groups GAO surveyed suggested options 
for improving disclosure, some of which would require statutory 
changes while others could be achieved within the existing regulatory 
framework. One suggested statutory change was the repeal of the Tower 
Amendment, which some experts believed would allow federal regulators 
to directly require issuers to make disclosures, but SEC and MSRB 
staff did not agree. The Tower Amendment prohibits SEC and MSRB from 
requiring issuers of municipal securities to file certain materials 
with them. While MSRB and SEC staff said that repealing the Tower 
Amendment would remove the prohibitions on requiring issuers to file 
certain materials with them, they noted that it would have no real 
effect on what they can require issuers to disclose because municipal 
issuers are exempt from SEC registration and MSRB does not otherwise 
have affirmative authority to regulate municipal issuers. Other 
suggestions from experts and market participant groups requiring 
statutory changes included mandating accounting standards and 
requiring the submission of financial information at intervals more 
frequent than annually. Experts and market participant groups 
suggested other options to improve disclosure that could be achieved 
within the existing regulatory framework, including further improving 
and promoting MSRB's Electronic Municipal Market Access (EMMA) system, 
which since July 2009 has served as the official central repository 
for disclosures about municipal securities. While experts and market 
participants said that EMMA had greatly improved their access to 
information on municipal securities, many suggested that further 
enhancements to EMMA would increase the usefulness of the system to 
investors and issuers. MSRB issued a plan in January 2012 to improve 
EMMA 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 recommendations on measures to improve primary and 
secondary market disclosure practices, market practices, and 
associated regulation. 

View [hyperlink, http://www.gao.gov/products/GAO-12-698]. For more 
information, contact A. Nicole Clowers at (202) 512-8678 or 
clowersa@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Investors and Market Participants Cited Limitations of Continuing 
Disclosures: 

Options for Improving Disclosure Involve Potential Benefits and 
Challenges: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

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

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

Appendix IV: Pension Liability Reporting: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

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

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

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

[End of section] 

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.[Footnote 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.[Footnote 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).[Footnote 3] State and local 
governments account for 80 percent of the total outstanding.[Footnote 
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. 
[Footnote 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.[Footnote 6] 
The specific prohibitions differ for each regulator, pursuant to 
provisions of the Securities Acts Amendments of 1975, generally known 
as the Tower Amendment.[Footnote 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 
required to be made by issuers of municipal securities.[Footnote 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-regulatory organizations (SRO), and 
associations, including SEC, MSRB, the Financial Industry Regulatory 
Authority (FINRA), and the North American Securities Administrators 
Association.[Footnote 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.[Footnote 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. 

Background: 

SEC and MSRB are the primary entities that have authority at the 
federal 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.[Footnote 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.[Footnote 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.[Footnote 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 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.[Footnote 
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.[Footnote 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.[Footnote 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 them to investors.[Footnote 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. 
[Footnote 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, 
insolvency, receivership and similar events.[Footnote 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. 

Investors and Market Participants Cited Limitations of Continuing 
Disclosures: 

Many market participants told us that primary market disclosure for 
municipal securities investors is generally useful. However, investors 
and market participants with whom we spoke frequently cited 
limitations to continuing disclosure, including the timeliness of 
annual financial information, the frequency with which information is 
provided, and incomplete information. Our analysis found that current 
regulatory 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 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 Participants Most Commonly Cited Timeliness, 
Frequency, and Completeness as Disclosure Limitations: 

Many market participants told us primary market disclosure is 
generally useful for investors and EMMA has improved investor and 
market participants' ability to access disclosure documents, but 
investors and market participants have identified limitations to 
disclosure. According to MSRB officials, participants in the municipal 
securities market generally acknowledge that primary market 
disclosure--official statements--contains the material facts an 
investor needs to know about an issuer and a security.[Footnote 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.[Footnote 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 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.[Footnote 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.[Footnote 23] Three market participants further indicated 
that untimely information was particularly worrisome for investors at 
a time when state and local governments have been 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.[Footnote 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 
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.[Footnote 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.[Footnote 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. 

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.[Footnote 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.[Footnote 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 Broadly Reflect Disclosure Principles but Some 
Limitations Exist: 

We compared requirements for continuing disclosure in 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.[Footnote 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 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[Footnote 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 year[Footnote 31]s. 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 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: 

* 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.[Footnote 32] 

Effect of Limitations of Disclosure Regulations on Individual 
Investors Largely Is Unknown: 

The risk posed to investors by the limitations of disclosure 
regulations cited by market participants is largely unknown because 
(1) there is limited information about the extent to which investors 
use disclosures to make investment decisions, (2) there is limited 
information about the 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 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.[Footnote 33] Rather, surveyed investors most 
frequently cited financial advisors or brokers as the most important 
source of investment information.[Footnote 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 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.[Footnote 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.[Footnote 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 table 1).[Footnote 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.[Footnote 38] 

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

U.S. municipal issuers; 
Standard & Poor's: 1 year: 0.02%; 
Standard & Poor's: 5 years: 0.10%; 
Standard & Poor's: 10 years: 0.17%; 
Moody's Investors Service: 1 year: 0.01%; 
Moody's Investors Service: 5 years: 0.07%; 
Moody's Investors Service: 10 years: 0.13%. 

Global corporate issuers; 
Standard & Poor's: 1 year: 1.57%; 
Standard & Poor's: 5 years: 6.58%; 
Standard & Poor's: 10 years: 9.83%; 
Moody's Investors Service: 1 year: 1.61%; 
Moody's Investors Service: 5 years: 7.24%; 
Moody's Investors Service: 10 years: 11.18%. 

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. 

[End of table] 

In addition, state and local government issuers have a strong 
incentive to meet their payment obligations because issuances of 
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.[Footnote 39] Some 
states also have mechanisms intended to address financial crises, 
allowing for state intervention into a local government's finances. 
[Footnote 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.[Footnote 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 primary market and continuing disclosure.[Footnote 
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.[Footnote 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.[Footnote 44] Furthermore, SEC 
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.[Footnote 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.[Footnote 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.[Footnote 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.[Footnote 48] 

Options for Improving Disclosure Involve Potential Benefits and 
Challenges: 

Experts and market participant groups we surveyed suggested a number 
of options for improving municipal securities disclosure. Some of the 
options would require statutory changes while others could be achieved 
within existing statutory authority. Each of the suggested options 
involves trade-offs, and market participants and the regulators' views 
on the 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. 

Some Options Identified to Improve Disclosure Would Require Statutory 
Changes: 

Experts and market participant groups we surveyed suggested some 
options to improve disclosure that would require statutory changes. 
While 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 Suggested Repealing the Tower Amendment, but 
Regulators Said It Would Have No Effect on Disclosure: 

Seven of 21 experts we surveyed suggested that Congress repeal the 
Tower Amendment--provisions that prohibit SEC and MSRB from requiring 
issuers to file any information with them prior to any sale, and MSRB 
from requiring issuers to provide them or investors with any 
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 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.[Footnote 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 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 Improving Disclosure Would Require Other 
Statutory Changes: 

In addition to repealing the Tower Amendment, many of the experts and 
market participants we surveyed identified additional options that 
would require statutory changes. These include prescribing accounting 
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 GAAP for state and local governments.[Footnote 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.[Footnote 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 
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.[Footnote 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.[Footnote 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-setting body, such as 
GASB, as "generally accepted."[Footnote 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.[Footnote 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.[Footnote 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 frames.[Footnote 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.[Footnote 
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 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 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. 
[Footnote 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.[Footnote 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 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.[Footnote 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 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 Improving Continuing Disclosure Could Be Achieved 
within Existing Regulatory Framework: 

Experts and market participant groups we surveyed and others with whom 
we spoke suggested other options for improving disclosure that could 
be implemented within the existing regulatory framework. These 
included further improving the functionality of EMMA and strengthening 
efforts to promote EMMA to issuers and investors. Other options 
included 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.[Footnote 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 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 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 Activities: 

Three of 21 market participant groups and 1 of 21 experts we surveyed, 
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 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).[Footnote 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.[Footnote 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 Standardize Disclosure: 

Six of 21 experts and 8 of 21 market participant groups we surveyed 
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 
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 financial report prepared in accordance with GASB rules provide 
a management discussion and analysis.[Footnote 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 Taking Steps to Address Some Options: 

MSRB has taken recent actions to improve the timeliness of disclosure 
of financial information, the frequency of disclosure, and the 
completeness 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 
displayed in EMMA, making lapses in annual disclosure more transparent 
to users.[Footnote 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.[Footnote 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.[Footnote 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.[Footnote 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 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).[Footnote 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 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. 

Agency Comments: 

We provided a draft of this report to SEC, MSRB, and FINRA for 
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 [hyperlink, 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. 

Signed by: 

A. Nicole Clowers: 
Director: 
Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and 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 
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.[Footnote 71] 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 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.[Footnote 72] 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 
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. 

[End of section] 

Appendix II: Key Federal Disclosure 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: Applicability of antifraud 
provisions[A]; 
Municipal: Yes; SEC is authorized to take enforcement actions against 
any person or entity that violates antifraud provisions; 
Corporate: Yes; SEC is authorized to take enforcement actions against 
any person or entity that violates antifraud provisions. 

Key federal disclosure requirement: Use of generally accepted 
accounting principles; 
Municipal: No; Issuers are not required to prepare financial 
statements according to generally accepted accounting principles 
(GAAP). There are no requirements covering the preparation of 
financial statements. Nevertheless, we previously reported that all 
states use GAAP for annual financial statements.[B] 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); 
Corporate: Yes; SEC requires U.S. public companies to prepare 
financial statements according to GAAP. SEC designated FASB as the 
GAAP standard setter for corporate filers. Auditors must conduct 
audits in accordance with the standards of the Public Company 
Accounting Oversight Board. 

Key federal disclosure requirement: Regulatory review; 
Municipal: No; SEC is not authorized to require municipal issuers to 
file presale information with SEC prior to the sale of municipal 
securities; 
Corporate: Yes; SEC staff may review a company's filings for various 
purposes. SEC reviews some registration 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. 

Key federal disclosure requirement: Disclosure repository; 
Municipal: Yes; MSRB maintains EMMA (Electronic Municipal Markets 
Access), an online repository for disclosures; 
Corporate: Yes; SEC maintains EDGAR (Electronic Data Gathering 
Analysis and Retrieval), an online repository for disclosures. 

Key federal disclosure requirement: Exemptions; 
Municipal: Yes; The following types of municipal securities offerings 
are exempt, in whole or in part, from Rule 15c2-12 if one or more of 
the following conditions are met:[E] 
* principal amount is less than $1 million; 
* maturity is 18 months or less; or; 
* the securities are sold in denominations of $100,000 or more and 
meet standards for limited distribution. 
There is a limited exemption from Rule 15c2-12 for offerings of 
municipal securities of issuers with less than $10 million in 
outstanding municipal securities; 
Corporate: Yes; Federal securities laws provide various exemptions 
from registration for the following securities or transactions: 
* offered and sold to residents of one state; 
* private offerings; or; 
* sold through employee benefit plans. 
A public reporting company may terminate its periodic reporting 
obligations based on number of shareholders and asset value, or such 
obligation may be statutorily suspended. 

Key federal disclosure requirement: SEC registration; 
Municipal: No; The Securities Act of 1933 exempts municipal securities 
from registration requirements; 
Corporate: Yes; Offers and sales of securities must be registered 
under the Securities Act of 1933 unless an exemption is available. 

Key federal disclosure requirement: Primary offering disclosure; 
Municipal: Yes; For offerings subject to Rule 15c2-12, the rule 
requires underwriters to obtain and review an official statement 
consisting of information about the terms of the proposed offering, 
financial and operating data that is material to an evaluation of the 
offering, a description of the continuing disclosure undertaking to 
which the issuer agreed, and information on any failure to comply with 
any continuing disclosure undertaking in the previous 5 years. 
Obligation to provide primary offering disclosure to investors is on 
the underwriter; 
Corporate: Yes; For registered offerings of securities, SEC's 
requirements include a registration statement and prospectus 
consisting of information about the issuer, including financial 
information, the terms of the proposed offering, the most significant 
risk factors affecting the issuer, and the interests of experts or 
counsel that advised the issuer, among other things. There are 
securities offerings that are exempt from registration and therefore 
exempt from such disclosure requirements. The issuer is obligated to 
provide primary offering disclosure. 

Key federal disclosure requirement: Continuing or secondary market 
disclosure content requirement; 
Municipal: Limited; Rule 15c2-12 requires, as a condition to 
underwriting, an underwriter to reasonably determine that an issuer or 
obligated person has agreed in writing at offering to provide ongoing 
notices of certain events and annual financial 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; 
Corporate: Yes; SEC requires public reporting companies to submit 
annual audited financial statements and unaudited quarterly financial 
statements. SEC also requires public reporting companies to file 
notices of certain current specified events. 

Key federal disclosure requirement: Secondary market disclosure format 
requirement; 
Municipal: Limited; MSRB requires EMMA submissions in portable 
document format and to be accompanied by certain indexing information; 
Corporate: Yes; SEC requires that information filed on EDGAR to be in 
plain text or HTML. SEC requires most filers to submit data in an 
interactive format, XBRL. SEC provides detailed written guidance on 
the form and content for various filing requirements. 

Key federal disclosure requirement: Secondary market disclosure timing 
requirement; 
Municipal: Limited; There is no federal requirement to provide annual 
financial information within a certain time frame after the end of the 
fiscal year. Rule 15c2-12, however, requires that the date be 
specified in the written undertaking of the issuer or other obligated 
person. SEC Rule 15c2-12 requires continuing disclosure 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; 
Corporate: Yes; Annual financial information must be filed within 45, 
60, or 90 days after the end of the fiscal year, depending on the type 
of issuer. Quarterly financial information must be filed within 45 
days after the end of the quarter. Current event notices must be filed 
within 4 business days of the event date. 

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). 

[End of table] 

[End of section] 

Appendix III: Principles of Effective Disclosure 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.[Footnote 73] 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: Allocation of accountability; 
The issuer or obligated person is responsible for compliance with the 
continuing disclosure obligation; 
Is this principle reflected in regulation? Yes; SEC Rule 15c2-12 
requires, as a condition of an underwriting, that an 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. 

Principle: Continuing disclosure obligation; 
Issuers or obligated persons should have a continuing disclosure 
obligation requiring disclosure of all information that would be 
material to an investors' investment decision; 
Is this principle reflected in regulation? Yes; SEC Rule 15c2-12 
requires, as a condition of an underwriting, that an 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. 

Principle: Disclosure criteria; 
Continuing disclosure of information should be fairly presented, not 
be misleading or deceptive, and contain no material omission of 
information; 
Is this principle reflected in regulation? Yes; SEC's antifraud 
provisions apply to municipal securities and participants in the 
municipal securities market. SEC has used its antifraud authority to 
take enforcement actions against municipal issuers for disclosing 
misleading information about the size of pension obligations. 

Principle: Dissemination of information; 
Under the continuing disclosure obligation, issuers or obligated 
persons should ensure that full information is promptly made available 
to the market by using efficient, effective, and timely means of 
dissemination; 
Is this principle reflected in regulation? Yes; SEC Rule 15c2-12 
requires, as a condition to an underwriting, an underwriter must 
reasonably determine that an issuer or obligated person has undertaken 
to provide disclosure information on EMMA, which allows for prompt 
submission to the market. 

Principle: Equal treatment of disclosure; 
The information to be disclosed in compliance with the continuing 
disclosure obligation should not be disclosed to selected investors or 
other interested parties before it is released to the public. Narrow 
exceptions include advisors and rating agencies; 
Is this principle reflected in regulation? Yes; Although no federal 
regulation specifically requires that all disclosure information for 
municipal securities be shared evenly with all investors, municipal 
securities, like other securities, are subject to SEC insider trading 
restrictions. Also, SEC Rule 15c2-12 requires, as a condition to an 
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. 

Principle: Timeliness; 
Issuers or obligated persons should disclose ongoing information on a 
timely basis, including: 
* prompt disclosure of material developments, and; 
* annual information. 
Is this principle reflected in regulation? Partial; SEC Rule 15c2-12 
requires that as a condition of an underwriting, an underwriter must 
reasonably determine that an issuer or obligated person, if 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 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. 

Principle: Use of plain English in official statements; 
Official statements should: 
* use short sentences whenever possible; 
* 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. 
Is this principle reflected in regulation? No; There are no 
regulations requiring the use of plain English in official statements, 
although some industry guidance recommends this practice. 

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. 

[End of table] 

[End of section] 

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.[Footnote 74] 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 compliant with generally accepted accounting principles, or 
GAAP (for those entities that can choose whether to comply with GAAP). 
[Footnote 75] 

* 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. 
[Footnote 76] 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.[Footnote 77] 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 appropriate way to measure and 
accrue cost for these obligations) had become widely divergent. 
[Footnote 78] 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Karen Tremba, Assistant 
Director; Heather Chartier; William R. Chatlos; Rachel DeMarcus; 
Melissa Kornblau; Courtney LaFountain; G. Michael Mikota; Patricia 
Moye; Alise Nacson; Barbara Roesmann; and Kathryn Supinski made key 
contributions to this report. 

[End of section] 

Footnotes: 

[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. 

[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)). 

[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, [hyperlink, 
http://www.gao.gov/products/GAO-12-265] (Washington, D.C.: Jan. 17, 
2012). 

[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. 

[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. 

[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). 

[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 [hyperlink, http://emma.msrb.org]. 

[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. 

[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. 

[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. 

[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. 

[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. 

[27] See Michael G. Bartolotta, "Municipal Securities Rulemaking 
Board's Recommendations for Update of 1994 Interpretive Guidance," 
MSRB comment letter to SEC, [hyperlink, 
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). 

[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. 

[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. 

[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. 

[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. 

[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 [hyperlink, http://www.uscourts.gov/News/NewsView/10-05-
14/Bankruptcy_Filings_Highest_Since_2006.aspx]. 

[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. 

[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 
[hyperlink, http://www.gao.gov/products/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, [hyperlink, 
http://www.gao.gov/products/GAO-12-322] (Washington, D.C.: Mar. 2, 
2012). 

[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). 

[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. 

[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, [hyperlink, http://www.gao.gov/products/GAO-11-267R] 
(Washington, D.C.: Jan. 18, 2011). 

[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). 

[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. 

[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. 

[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. 

[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). 

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

[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). 

[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. 

[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 [hyperlink, http://www.msrb.org/About-
MSRB/Programs/Long-Range-Plan-for-Market-Transparency-Products.aspx]. 

[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 [hyperlink, 
http://www.gao.gov/products/GAO-12-265]. Instead, staff held a number 
of "mini muni" meetings, with a variety of municipal securities market 
stakeholders at SEC's offices. 

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

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

[73] 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. 

[74] 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). 

[75] 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. 

[76] National Association of Bond Lawyers, Considerations in Preparing 
Disclosure in Official Statements Regarding an Issuer's Pension 
Funding Obligations, (May 15, 2012). Available at [hyperlink, 
http://www.nabl.org/uploads/cms/documents/pension_funding_obligations_do
cument_5-18-12_b.pdf], as of May 18, 2012. 

[77] 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. 

[78] 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). 

[End of section] 

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