Elisse Walter is leaving the Securities and Exchange Commission, but the commissioner and former chairman who worked to shed more light on the municipal market is confident her colleagues will carry on the push for increased transparency when she leaves after five years.

In a lengthy interview with her and SEC muni chief John Cross, Walter, 63 talked about her achievements, issues facing the muni market, and the goals she hopes the commission will achieve after her retirement. She will be replaced by Kara Stein, a former aide to Sen. Jack Reed, D-R.I. who was confirmed for the SEC post by the Senate on Aug. 1.

“I actually think the whole commission is behind this,” Walter said of the increased focus on legislative and regulatory changes needed for the municipal market highlighted in a report she spearheaded that was issued last year with the support of all of the commissioners.

“I take a little bit of credit for helping to pluck it out of a more obscure place than it belonged. But, particularly with John Cross here, we’ve got leadership and the other commissioners are very interested in other initiatives to improve both disclosure and price transparency in the municipal market.”

After Walter’s 2009 speech at Fordham Law School in her native New York, in which she called for the repeal of the Tower amendment, the SEC began an examination of the municipal market that culminated in the report, which recommended  series of legislative and regulatory steps that could be taken to improve the market.

More recently, commissioner Daniel Gallagher has repeatedly spoken out on muni issues, cautioning investors about higher interest rates and the need for individuals to be held accountable in enforcement actions.

“I think there is a rather strong feeling, both on behalf of the staff and the commission that more work needs to be done here,” Walter said. “The report was put out by the commission itself, it was not a staff report, and it was unanimous.”

She added that she is proud of how far the commission’s muni enforcement efforts have come, as well. The SEC has filed a series of precedent-setting enforcement cases this year, including charging Illinois over faulty pension liability disclosure, Harrisburg, Pa. with making fraudulent statements outside of its bond documents, and an Indiana school district and its underwriter for falsely claiming the issuer was complying with continuing disclosure obligations. Walter says issuers and transaction participants should now understand that the SEC is serious about muni enforcement.

“We’ve come a very long way in the last five years from people who asked me for safe harbors from the anti-fraud provisions, so that there were things that people could say and never be subject to fraud for it, which I found astounding as a request,” she said. There has been a growing “understanding that this is a securities market and it is subject to securities market rules.”

Cross said the SEC will continue its efforts on that front. “I take Exhibit A to be Harrisburg,” he said.

Harrisburg had a major financial liability due to an incinerator financing, and the SEC charged the city for failing to stay current on its continuing disclosure documents while simultaneously feeding the market misleading information in speeches and other materials.

“They hadn’t been filing their continuing disclosure reports for years and so the 21-A report there pretty starkly highlighted, from an enforcement perspective, the need for ongoing procedures and tools to track and make sure you’re following the continuing disclosure agreements,” Cross said. “So, you know, I expect that we will be looking for other ways to emphasize that point.”

Walter said the bottom line is that market participants who rely on that data get cheated if issuers are not living up to their disclosure agreements.

“There are a lot of people out there who are not following through on what they contracted to do,” she said. “But the important part of that is what underlies it, which means issuers should be not be allowed to avoid disclosing current information and then, when they are preparing to do another deal, say, “Oh, whoops! I’ll bring it up to date!”

“You should not be able to engage in that kind of behavior and it’s not right that investors in those municipal bonds have no current information,” she said.

Walter also discussed another trend in enforcement that new chairman Mary Jo White has spoken publicly about several times: increasingly naming and seeking culpability from issuer officials and other individuals who violate the securities laws. Many members of the market were critical of SEC enforcement actions that both declined to name any individuals and allowed alleged lawbreakers to settle without accepting guilt. Most recently, the commission charged Miami, Fla.’s former budget director with violations, along with the city itself.

“I think this has been an area in which people said, ‘Oh no. they’ll never name anyone here,’ and that’s just not true,” Walter said. “As public servants, we have a great deal of empathy for people who do those jobs. But, they need to understand what they are doing and what responsibilities they have taken on and fulfill them. You can’t say, ‘I’m a public official, so I’m not accountable.’”


Though both Walter and Cross acknowledged that the SEC has no jurisdiction over bankruptcy proceedings, they said they are keeping an eye on the unfolding saga of Detroit and its bankruptcy filing. The city’s emergency manager, Kevyn Orr, is attempting to treat general obligation bondholders as holders of unsecured debt and offering them pennies on the dollar back on their investments. Cross said Detroit’s situation in part illustrates the magnitude of pension liability issues, something the SEC will continue to pay attention to from an enforcement standpoint.

“If you look at the Detroit bankruptcy that just occurred, something like $3.5 billion in direct pension liabilities and another $6.5 billion in health care post-employment liabilities,” Cross said. “Almost half of their total $19 billion in exposure is related to those topics. That’s not to say that’s what Detroit’s problem is, but it is illustrative of the magnitude of that issue, potentially.”

“That’s a big bankruptcy case,” he continued, “and it will be important to follow the kind of the rulings and the way they treat different kinds of debt and other liabilities for federal bankruptcy purposes as it relates to potential implications for other municipalities. On the general obligation front, you look at Detroit and one might ask, ‘Which is stronger, a general obligation backed by the taxing power of a very limited tax base, or the pledged ‘secured revenue’ of the water and sewer system when there are actually some revenues in the house? And should those be treated the same or differently?”

Walter said the Detroit issue could represent a wider disclosure problem if investors in GO bonds believe the pledge behind those bonds is much stronger and issuers that don’t follow through with their commitments when they are under fiscal stress.

“There can very well be disclosure implications among other things depending on what happens there, because people need to know what they’re buying,” she said.

Cross added that some issuers might be creating confusion by labeling bonds as “general obligation” even though they are not backed by the full faith and credit of a municipality, something many investors expect from GO bonds. “I think they’re saying ‘general obligation,’ when it’s not the full taxing power,” Cross said. “Maybe it’s general revenue or a general unsecured obligation. That is an issue that probably warrants more attention.”

As Walter departs the commission, there remain challenges on various regulatory levels. Walter said she has no regrets, but wishes she could have achieved more, especially the legislation called for by the muni market report.  One recommendation, for example, was for Congress to give the SEC the authority to dictate the timing and content of issuers’ secondary market disclosures.

“I’m not regretful, but I wish that we had legislation passed,” she said. “That was probably never a realistic expectation to have that done by now,” she said. “I wish we had fixed all the problems that we have seen. Those are unrealistic expectations, but that’s my wish list.”

She also remains very concerned about the lack of price transparency, particularly for retail investors who do not have access to information that many institutional investors have.

The Municipal Securities Rulemaking Board has just issued a concept release seeking comments on how the market can improve pre- and post-trade transparency.

Unlike other securities markets, there is no single central trading platform that investors can look to for pricing information. Walter suggested brokers’ brokers and alternative trading systems could provide information such as bid-wanteds, announcements that a holder of securities will accept bids, and quotations.

“I’m particularly worried about someone who goes to sell muni bonds and has no earthly idea about how good the price they just got is,” Walter said. “I know that the last transaction in the bond I want to sell was at 96, and I’m told the price that I can get is 88 ...  How do I judge that?”

“We want retail investors involved in this market and they don’t have enough information to feel confident that what they’re getting is the right price or way off. I really do think we need to look at various price transparency issues, and I’d like to see a much more rigorous disclosure practice, particularly with respect to timeliness. And not just on an annual basis, because a year’s a long time.”

Walter declined to comment on the Securities Industry and Financial Markets Association’s “execution with diligence” proposal, the dealer group’s contribution to the ongoing debate about developing a muni-specific best execution rule. Walter said she sees no reason that there should not be a rule requiring dealers to make an effort to get the best deals for their customers and is uncomfortable at the idea that dealers would try to avoid using the term “best execution.”

“My initial reaction is to be disturbed by the distress over the label,” she said. “The muni market should have the same type of obligation that applies in the corporate market. I’m not saying it has to have the same exact content, but the notion that we can’t have a best execution concept in the muni market is something that, to say I’m not favorably disposed to it, would be an understatement.”

Walter is adamant that she does not want another full-time job, but also that she does not want to completely retire. “I’d like to keep my hand in policy, but I don’t know how yet,” she said. “I’m interested in a lot of accounting and disclosure issues.”

She might also do something a bit different she added.

Walter has publicly shared her battle with ovarian cancer, which doctors diagnosed her with shortly after she was named to the commission in 2008. She is healthy today, she said, and might be interested in doing some public interest work in that arena.

“I haven’t totally ruled out trying to find some public interest activity outside of our field where I’d like to do some work part time. You know, something involved with children, or health, maybe ovarian cancer. I don’t know.”

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