Virtual Remarks at the National Association of Health and Educational Finance Authorities Winter Webinar
Good morning to everyone. It is a pleasure to address this group, which helps facilitate capital formation in the municipal market for health care and educational facilities. Before I begin, I must remind you that these remarks are provided in my official capacity as the Commission’s Director of the Office of Municipal Securities but do not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff.
I have been happy to observe that over the past few decades, many municipal issuers, and the conduit borrowers that finance projects through them, have adopted primary and secondary market or continuing disclosure practices that advance transparency and fairness in the municipal securities market, allowing investors to make informed investment decisions. But at what could be considered a whirlwind pace (at least for the municipal securities market), our market is evolving. With shifting investor ownership, adoption of innovative financing mechanisms and products, and technological developments, I find myself often revisiting the fundamentals of the Securities Act of 1933, as amended (Securities Act), the Securities Exchange Act of 1934, as amended (Exchange Act), and the Municipal Advisor Adopting Release.[1]
So today, I’m going to talk to you about an aspect of disclosure that I view as crucial to further improve the municipal securities market.
Disclosure should encompass all material information that would allow a reasonable person to make an informed investment decision. Information is material if under all the circumstances, there is “a substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available.”[2] The reasonable investor test is an objective test.[3] Materiality serves as a fundamental tenet in defining disclosure requirements, but there is no one-size-fits-all approach to disclosure in the municipal securities market. That is why, especially in the municipal securities market, we often speak about a principles-based approach to disclosure.[4]
Investors, analysts[5] and other market professionals recognize that the information needed to gauge credit risk is not subject to a one-size-fits-all approach: that the information needed will depend on the type of issuer and credit involved. I would like to emphasize the point that the type of information that is material for conduit issuances will vary depending on the sources for repayment of the security,[6] especially where there are a wide range of security structures.
That lays the framework for an aspect of disclosure that I view as crucial to further improve the municipal securities market. As conduit issuers, you serve an important role in facilitating the financing of projects that benefit the public in various ways.[7] You also serve as gatekeepers because you select which conduit borrowers can access the municipal securities market. However, many times, the process used by conduit issuers to select the projects they will be financing on behalf of conduit borrowers is not disclosed. Depending upon the facts and circumstances, that may be a disclosure issue because investors may not be able to properly evaluate the level of risk they are taking on – in essence making a blind investment – when they do not have material information about your project selection process.
As I see it, a lack of transparency in the project selection process could make it unclear to an investor what type of vetting, if any, a conduit issuer has performed for the projects they finance. Investors may mistakenly assume that an issuer’s involvement in the conduit financing implies a rigorous vetting process; or an investor may mistakenly assume that all conduit issuers have similar vetting processes for the projects they approve, even though, from what I have observed, these processes do vary widely across conduit issuers.
I am encouraged when I see conduit issuers who have clearly stated policies or guidelines establishing the creditworthiness standards and eligibility requirements for the projects they will finance, such as: requiring a minimum investment-grade rating, and if unrated, requiring forms of credit enhancements; demonstration of revenue generation or repayment ability of the conduit borrower through feasibility studies conducted by the borrower’s consultants; and alignment with a public benefit, particularly for 501(c)(3) borrowers.
To be clear, I am not suggesting specific standards and/or eligibility requirements for your project selection process. However, I believe that conduit issuers that utilize rating reports and feasibility studies, especially for specialized projects, and conduct an independent analysis of these reports and studies to ensure compliance with statutory and financing eligibility requirements and then share this information[8] publicly, may leave investors in a better position to evaluate the risks of a conduit financed project.
For conduit financings, investor risk is tied to the borrower and/or the project, and investors can typically only look to the conduit borrower for the repayment of the bonds.[9] If a conduit issuer or borrower suppresses information related to feasibility studies or ratings discussions that questioned the financial viability of a project or legal opinions that questioned the legal structure of the project, they may be depriving investors of material information.[10] With non-governmental conduit borrowers driving defaults[11] in the municipal securities market, I believe a clear understanding of a conduit issuer’s project selection process may be material to an investor’s understanding of how conduit issuers, as gatekeepers, assess the risks associated with the projects[12] they finance.
Thank you again for the invitation to discuss this important issue with you. I look forward to continuing exchanging ideas on how we can work together to continue improving the municipal securities market.
[1] Registration of Municipal Advisors, Exchange Act Release No. 70462 (Sept. 20, 2013), 78 FR 67468 (Nov. 12, 2013) (“Municipal Advisor Adopting Release”).
[2] TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
[3] Durning v. First Boston Corp., 815 F.2d 1265, 1268 (9th Cir. 1987) (articulating the test as “whether an investor who has been reasonably diligent in reviewing the Official Statement would have been mislead” which is an objective test).
[4] The Commission issued guidance to assist municipal issuers, and others, in meeting their obligations under the federal securities laws, including under provisions of Securities Act Section 17(a) [15 U.S.C. 77q(a)], Exchange Act Section 10(b) [15 U.S.C. 78j(b)], and Exchange Act Rule 10(b)-5 [17 CFR 240.10b-5] relating to fraud in the offer or sale of securities or in connection with the purchase or sale of securities (collectively, the “antifraud provisions”) in 1994. See Exchange Act Release No. 33741, “Statement of the Commission Regarding Disclosure Obligations of Municipal Securities Issuers and Others” (Mar. 9, 1994), 59 FR 12748, 12750 (Mar. 17, 1994) (“1994 Interpretive Release”). See also Application of Antifraud Provisions to Public Statements of Issuers and Obligated Persons of Municipal Securities in the Secondary Market, Staff Legal Bulletin No. 21 (OMS) (Feb. 7, 2020) (“Staff Legal Bulletin No. 21”), available at https://www.sec.gov/rules-regulations/staff-guidance/staff-legal-bulletins/application-antifraud-provisions-staff-legal-bulletin-21#_edn13 (explaining that “[t]he Commission’s principles-based approach to the application of the antifraud provisions applies to all statements of municipal issuers that are reasonably expected to reach investors and the trading markets notwithstanding changes in municipal issuer disclosure practices, technology, investor expectations, and regulatory framework.").
[5] See, e.g. Securities and Exchange Commission, Report on the Municipal Securities Market (July 31, 2012) (“Report on the Municipal Securities Market”), at 55, available at https://www.sec.gov/files/munireport073112.pdf (providing that “[t]o gauge the credit risk of different types of municipal securities, analysts and investors have historically needed information that depends on the type of issuer and credit involved.”).
[6] See generally 1994 Interpretive Release, supra note 4, 59 FR at 12748 (Commission noting that one basic mechanism that can be used to address potential antifraud liability includes the timely reporting of material events reflecting upon the creditworthiness of the issuer or the obligor and the terms of its securities); Report of Investigation in the Matter of County of Orange, Cal. As it Relates to the Conduct of the Members of the Board of Supervisors, Exchange Act Release No. 36761 (Jan. 24, 1996), available at https://www.sec.gov/enforcement-litigation/reports-investigations/municipal-bond-participants-public-officials (“Orange County Report”) (Commission finding that an issuer’s financial condition, including its economic reliance on interest income from investment pools, was important to investors because funds pledged to repay certain of the issuer’s outstanding securities were invested in the investment pools which materially affected the issuer’s ability to repay the securities).
[7] A conduit financing means the issuance of municipal securities (“conduit bonds”) by a municipality or an agency or instrumentality of a municipality (“conduit issuer”) on behalf of a third party (“conduit borrower”), which can be a for-profit entity engaged in private enterprise, a 501(c)(3) organization, or another governmental entity. Definition of “Conduit Financing” in Glossary of Municipal Securities Terms, Municipal Securities Rulemaking Board (“MSRB”) (3d ed. 2013), available at https://www.msrb.org/sites/default/files/2022-08/MSRB-Glossary-of-Municipal-Securities-Terms-Third_Edition-August-2013.pdf.
[8] Based on guidance, conduit issuers should be providing investors with “operational information concerning the activities of the private enterprise that will provide the cash flows to service the debt—for example, financial reporting, legal proceedings, changes in indebtedness, defaults and other significant developments relating to the underlying corporate obligor.” See 1994 Interpretive Release, supra note 4, 59 FR at 12753.
[9] Id. at 12755.
[10] Exchange Act Section 10(b) and Rule 10b-5(b) thereunder “do not create an affirmative duty to disclose any and all material information. Disclosure is required under these provisions only when necessary to “make . . . statements made, in light of the circumstances under which they were made, not misleading.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011). Conduit issuers and conduit borrowers similarly have control over what they say to the market. However, conduit issuers and conduit borrowers cannot immunize themselves from antifraud liability by reporting a materially misleading picture of its financial condition, legal status or prospects if it simultaneously suppresses known, material adverse information that, if disclosed, would significantly alter the “total mix” of information available to the investor. See, e.g., City of Miami, Securities Act Release No. 8213, Exchange Act Release No. 47552, 79 S.E.C. Docket 2580, 2003 WL 1412636 at *9 (Mar. 21, 2003) (Commission opinion) (City was at least reckless in misstating that is fiscal year 1995 budget was balanced, downplaying its cash flow crisis, failing to disclose that the City needed to issue debt to resolve its crisis, and misrepresented that there were no material change in its financial condition from the prior fiscal year); Maricopa County, Securities Act Release No. 7354, Exchange Act Release No. 37779, A.P. File No. 3-9118 (Oct. 3, 1996) (settlement to cease-and-desist order finding antifraud violations where a municipal issuer failed to disclose that its cash flow position had materially declined and misrepresented that there had been no material change in its financial condition).
[11] Historically, conduit bonds issued for private entities and projects have accounted for a disproportionately large share of the municipal securities market’s total defaults. See Report on the Municipal Securities Market, supra note 5, at 23-24 and accompanying footnotes. Conduits have continued to drive defaults in the municipal securities market. See Promarket, David Dubrow and Kent Hiteshew, “Decades of Regulatory Exemptions Have Been to the Detriment of the Municipal Bond Market” (Oct. 22, 2024), available at https://www.promarket.org/2024/10/22/decades-of-regulatory-exemptions-have-been-to-the-detriment-of-the-municipal-bond-market/; Bloomberg, Muni Bond Blowup Exposes Flaws in $600 Billion Corner of Market (Nov. 17, 2023), available at https://www.bloomberg.com/news/articles/2023-11-17/muni-bond-blowup-exposes-flaws-in-600-billion-corner-of-market (Municipal Market Analytics estimating that “conduits already account for roughly three-quarters of the $15.5 billion of municipal bonds currently in default . . . “.).
[12] See, e.g., Bloomberg, Muni-Bond Funds Burned Chasing Yield with Wood-Pellet Bankruptcy (Mar. 28, 2016), available at https://www.bloomberg.com/news/articles/2016-03-28/muni-bond-funds-burned-chasing-yield-with-wood-pellet-bankruptcy; The Bond Buyer, Another Arizona conduit authority borrower files for bankruptcy (Mar. 7, 2023), available at https://www.bondbuyer.com/news/another-arizona-conduit-authority-borrower-files-for-bankruptcy; Bloomberg, Texas Luxury Student Dorm Financed by Bonds Falls Deeper Into Distress (July 6, 2023), available at https://www.bloomberg.com/news/articles/2023-07-06/texas-luxury-dorm-financed-by-bonds-falls-deeper-into-distress; The Bond Buyer, Proton facilities default on payments (Jan. 3, 2025), available at https://www.bondbuyer.com/news/proton-cancer-facilities-in-maryland-arkansas-default-on-payments.
Last Reviewed or Updated: Feb. 27, 2026