MUNICIPAL 

SECURITIES

Options for Improving 

Continuing Disclosure

Report to Congressional Committees

July 2012

GAO-12-698

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-698, a report to 

congressional committees 

July 2012 

MUNICIPAL SECURITIES

Options for Improving Continuing Disclosure

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 GAO-12-698. For more information, 

contact A. Nicole Clowers at (202) 512-8678 

or clowersa@gao.gov. 
Page i GAO-12-698 Municipal Securities 

Letter 1 

Background 5

Investors and Market Participants Cited Limitations of Continuing 

Disclosures 8

Options for Improving Disclosure Involve Potential Benefits and 

Challenges 22

Agency Comments 41

Appendix I Objectives, Scope, and Methodology 42

Appendix II Key Federal Disclosure Requirements for Publicly Offered Municipal 

and Corporate Securities 46

Appendix III Principles of Effective Disclosure Compared with Current Disclosure 

Regulations for Municipal Securities 50

Appendix IV Pension Liability Reporting 52

Appendix V GAO Contact and Staff Acknowledgments 55

Tables

Table 1: Cumulative Average Default Rates for Municipal and 

Corporate Issuers (in Percentages), as of Year-end 2011 19

Table 2: Comparison of Key Federal Disclosure Requirements for 

Publicly Offered Municipal and Corporate Securities, as of 

June 2012 46

Table 3: Principles of Effective Disclosure Compared with Current 

Disclosure Regulations for Municipal Securities 50

Contents
Page ii GAO-12-698 Municipal Securities 

Abbreviations

CUSIP Committee on Uniform Security Identification Procedures

EMMA Electronic Municipal Markets Access

FASB Financial Accounting Standards Board

FINRA Financial Industry Regulatory Authority

GAAP generally accepted accounting principles

GASB Governmental Accounting Standards Board

MSRB Municipal Securities Rulemaking Board

SEC Securities and Exchange Commission

SRO self-regulatory organization

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Page 1 GAO-12-698 Municipal Securities 

United States Government Accountability Office 

Washington, DC 20548

July 19, 2012

The Honorable Tim Johnson

Chairman

The Honorable Richard C. Shelby

Ranking Member

Committee on Banking, Housing, and Urban Affairs

United States Senate

The Honorable Spencer Bachus

Chairman

The Honorable Barney Frank

Ranking Member

Committee on Financial Services

House of Representatives

Municipal securities are debt instruments that state and local 

governments issue to finance transportation, housing, hospitals, 

education, and other diverse public projects.1 The value of municipal 

securities outstanding was an estimated $3.7 trillion as of March 31, 

2012, with individuals (also known as retail investors) holding 50 percent 

of the total outstanding directly, such as through purchases from brokerdealers, and up to another 25 percent indirectly through investment 

funds.2 There are approximately 51,000 state and local government 

issuers of municipal securities and the number of separate outstanding 

municipal securities is estimated to be more than 1.3 million, according to 

information cited by the Securities and Exchange Commission (SEC).3

 

1

For the purpose of this report, municipal securities are debt instruments issued by state 

and local governments. Municipal securities also include certain types of nondebt 

instruments (known as municipal fund securities) that include interests in 529 college 

savings plans. Practices with respect to municipal fund securities are beyond the scope of 

this report.

2

Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the 

United States, June 7, 2012. Municipal securities are bought, sold, and underwritten by 

securities firms registered as brokers or dealers and by banks registered as municipal 

securities dealers (sometimes referred to as bank dealers). For purposes of this report, we 

collectively refer to securities firms and bank dealers that purchase, sell, and underwrite 

municipal securities as broker-dealers.

3

In comparison, SEC reported in 2006 that there were 9,428 public companies in the 

United States with requirements to report information with SEC.

 
 

Page 2 GAO-12-698 Municipal Securities 

State and local governments account for 80 percent of the total 

outstanding.4 Of the remaining 20 percent, corporate conduit borrowers 

(public and privately held companies) account for approximately 13 

percent and nonprofit conduit borrowers (such as schools, health care 

providers, and nonprofit housing developers) account for approximately 7 

percent.5

Concerns have been raised about whether investors—particularly retail 

investors—have access to enough information about municipal securities 

to make informed investment decisions. Some professional analysts also 

believe investors may be at heightened risk as states, municipalities, and 

other entities that issue debt struggle with the aftermath of the recent 

financial crisis and growing pension obligations. While the federal 

securities laws generally require certain disclosure in connection with the 

issuance of securities, Congress exempted municipal securities from the 

registration and periodic reporting provisions of the federal securities 

laws, but not the antifraud provisions. Furthermore, SEC and the 

Municipal Securities Rulemaking Board (MSRB) are not authorized to 

require issuers of municipal securities to file certain materials.

6 The 

specific prohibitions differ for each regulator, pursuant to provisions of the 

Securities Acts Amendments of 1975, generally known as the Tower 

Amendment.7

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

 

4

Flow of Funds Accounts, June 7, 2012.

5

Corporate and some nonprofit borrowers access the municipal market through 

governmental issuers that act as conduits to the market. 

6

SEC is the primary overseer and regulator of U.S. securities markets and administrator of 

federal securities laws. MSRB is a self-regulatory organization (SRO) created in 1975 with 

the mission to protect investors, state and local government issuers, other municipal 

entities, and the public interest by promoting a fair and efficient municipal securities 

market. 

7

In the Securities Acts Amendments of 1975, Congress prohibited SEC and MSRB from 

requiring any issuer of municipal securities, directly or indirectly, to file with them prior to 

the sale of such securities any application, report, or document in connection with the 

issuance, sale, or distribution of the securities. Congress further prohibited MSRB from 

requiring any issuer of municipal securities, directly or indirectly, to provide them or a 

purchaser or a prospective purchaser of such securities any application, report, document, 

or information with respect to the issuer. Pub. L. No. 94-29, § 15B(d), 89 Stat. 97 (1975) 

(codified at 15 U.S.C. § 78o-4(d)). 
 

Page 3 GAO-12-698 Municipal Securities 

required to be made by issuers of municipal securities.8

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, selfThis 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.

 

8

Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 

§976, 124 Stat. 1376, 1924 (2010). The act also requires us to examine the municipal 

securities market, a requirement that we completed in a separate report. See GAO, 

Municipal Securities: Overview of Market Structure, Pricing, and Regulation, GAO-12-265 

(Washington, D.C.: Jan. 17, 2012).
 

Page 4 GAO-12-698 Municipal Securities 

regulatory organizations (SRO), and associations, including SEC, MSRB, 

the Financial Industry Regulatory Authority (FINRA), and the North 

American Securities Administrators Association.9

To identify options for improving the information issuers disclose to 

investors, we reviewed securities laws, regulations, and guidance. We 

also reviewed SEC and FINRA examination manuals for SEC Rule 15c2-

12, which establishes requirements for the underwriters of municipal 

securities, and reviewed data on examinations that found violations of the 

rule.10

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.

Furthermore, we surveyed experts and groups representing 

issuers and other market participants, such as municipal advisors, brokerdealers, 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.

 

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. 

10For the text of SEC Rule 15c2-12, see 17 C.F.R. § 240.15c2-12.
 

Page 5 GAO-12-698 Municipal Securities 

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.11 SEC also oversees 

MSRB and FINRA. MSRB maintains an online repository of information 

(that is, EMMA) to promote market transparency, for example, by 

providing access to primary market and continuing disclosures and 

information about trade pricing.12 MSRB also provides educational 

materials to investors and issuers of municipal securities. MSRB 

regulates brokers, dealers, municipal securities dealers, and municipal 

advisors in the municipal securities market by adopting rules governing 

their conduct, which are subject to SEC approval. However, MSRB does 

not have authority to enforce these rules or examine entities for 

compliance with these rules. Rather, SEC, FINRA, and bank regulators 

enforce MSRB rules and conduct compliance examinations.13

The Tower Amendment prohibits SEC and MSRB from directly requiring 

state and local governments to submit information to them prior to sale. 

Specifically, SEC and MSRB cannot require issuers to file any information 

 

11Section 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.

12Disclosure 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. 

13FINRA 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. 

Background
 

Page 6 GAO-12-698 Municipal Securities 

with them prior to any sale, and MSRB also cannot require issuers to 

provide them or investors with any information either pre- or postsale. 

Furthermore, the Securities Act of 1933 exempts the securities that state 

and local governments issue from registration with SEC. Securities of 

state and local governments also are exempt from the periodic disclosure 

requirements of the Exchange Act of 1934. According to a 1975 Senate 

report, congressional reasons for the decision to continue to limit direct 

regulation of issuers when the 1975 amendments to the securities acts 

were enacted included respect for the rights of state governments to 

access the capital markets, concerns about the costs of regulation for 

state and local government issuers, and the perceived lack of abuses in 

the municipal market that would justify such an incursion on the states’ 

prerogatives.14

While federal regulators are prohibited from directly requiring issuers to 

file presale information on municipal securities, SEC has adopted rules—

applicable to broker-dealers acting as underwriters—that relate to primary 

market and continuing disclosures.15 More specifically, using its authority 

over broker-dealers and its broad authority to prevent fraud in connection 

with the offer, purchase, or sale of securities, SEC adopted Rule 15c2-12 

in 1989. The rule established disclosure requirements related to municipal 

securities in response to the need SEC found for increased 

transparency.16

 

14See S. Rep. No. 94-75 (1975).

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 

15With limited exceptions, state and local governments issue bonds through a brokerdealer 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. 

16According to a 1993 SEC staff report, SEC adopted Rule 15c2-12 in response to 

disclosure deficiencies highlighted in the 1983 default of the Washington Public Power 

Supply System, which was the largest payment default in municipal bond history at the 

time. They also cited concerns that official statements were not being made available to 

investors at initial offerings. See SEC, Division of Market Regulation, Staff Report on the 

Municipal Securities Market (September 1993).
 

Page 7 GAO-12-698 Municipal Securities 

them to investors.17

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.

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.

18

 

17An “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). 

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, 

18EMMA may be accessed at http://emma.msrb.org.
 

Page 8 GAO-12-698 Municipal Securities 

insolvency, receivership and similar events.19 MSRB allows issuers to 

voluntarily submit to EMMA on a continuing basis any other types of 

financial, operating, or event-based information, including (but not limited 

to) information about bank loans, quarterly or monthly financial 

information, consultant reports, and capital or other financing plans.

According to MSRB, users may conduct searches of issuances on EMMA 

using one or more of the following parameters: Committee on Uniform 

Security Identification Procedures (CUSIP) number, issuer name, issue 

description, obligated person name, state, maturity date, date of 

issuance, interest rate, and ratings. EMMA provides additional 

parameters to search for continuing disclosure documents and other 

information available through EMMA, including trade information.

Many market participants told us that primary market disclosure for 

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 

 

19SEC 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) nonpaymentrelated 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.

Investors and Market 

Participants Cited 

Limitations of 

Continuing 

Disclosures
 

Page 9 GAO-12-698 Municipal Securities 

participants indicated that, in practice, limitations exist in the current 

regulatory scheme. Further, the effect on individual investors of limitations 

to disclosure is largely unknown.

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.20 Investors and market participants such as groups

representing investment companies, bond lawyers, and broker-dealers 

also have indicated that the information provided at the time of issuance 

is comprehensive. Additionally, most market participant groups with 

whom we spoke said that MSRB’s EMMA website has greatly improved 

public access to disclosure compared with the prior system for obtaining 

disclosure documents.21

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 

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.

 

20There 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.

21Prior 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.

Investors and Market 

Participants Most 

Commonly Cited 

Timeliness, Frequency, and 

Completeness as 

Disclosure Limitations
 

Page 10 GAO-12-698 Municipal Securities 

agreement. Individual investors also frequently cited the readability of 

disclosures as a limitation.

• Timeliness—According to investors and other market participants, 

issuers release annual financial information too long after the end of 

their fiscal years for the information to be useful in making investment 

decisions. A Governmental Accounting Standards Board (GASB)

study of audited annual financial reports prepared in accordance with 

generally accepted accounting principles (GAAP) for state and local 

governments provided for fiscal years ending in 2006, 2007, and 2008 

found that the average time frame for issuing the reports varied by 

type and size of government. For example, issuance time frames 

averaged from 126 days after the end of the fiscal year for large 

special districts to 244 days for small counties.22 Similarly, according 

to National Association of State Comptrollers data, in fiscal year 2010 

states took an average of 198 days to complete their comprehensive 

annual financial reports. Also, in our case study of disclosures for 14 

securities in EMMA that were issued in 2009, our analysis found that 

the number of days after the end of the fiscal year in which issuers or 

obligated persons provided annual financial information to EMMA 

varied. Annual financial information for a nonprofit hospital system 

was provided 55 days after the end of a fiscal year, while annual 

financial information for a general obligation security issued by a 

school district was provided 257 days after the end of a fiscal year. 

Several investors and market participants said that filings provided 

well after the end of the fiscal year limit the information’s usefulness. 

The GASB study found similar sentiments: less than 9 percent of 

survey respondents—who represented a range of users of financial 

information—considered information received 6 months after the end 

of the fiscal year to be very useful.23

 

22See 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.

Three market participants further 

indicated that untimely information was particularly worrisome for 

investors at a time when state and local governments have been 

23Users surveyed included municipal bond analysts, legislative fiscal staff, and 

researchers at taxpayer associations and citizen groups.
 

Page 11 GAO-12-698 Municipal Securities 

facing credit stress. Moreover, evidence indicates that issuers have 

not always met the time frames by which they agreed to provide 

annual information. For example, a study by the California Debt and 

Investment Advisory Commission of certain securities issued in 

California from 2005 to 2009 found 11 percent filed more than 30 days 

after the agreed-upon date.24

• Frequency—Investors and other market participants also said that 

receiving financial information annually was not sufficient to monitor 

the financial condition of an issuer. An individual investor with whom 

we spoke and a professional analyst both noted that because 

disclosures generally are provided annually, investors often must 

learn important information about the current financial condition of an 

issuer from external sources such as newspaper articles. For 

instance, the individual investor told us that he may read in the 

newspaper that a town that issued securities was having budget 

problems; however, this information would not be disclosed to 

investors until the financial statements for the fiscal year were 

released at some point during the following year. A few market 

participants indicated that obtaining information more frequently was 

especially important for investors during times of economic stress. 

Information that investors and other market participants indicated 

would be useful to receive between annual financial statements 

included unaudited quarterly financial reports, cash-flow reports, yearto-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 

 

24See California Debt and Investment Advisory Commission, Municipal Market Disclosure: 

CAFR Filings: A Test of Compliance among California Issuers (CDIAC No. 11-04). This 

study tested whether issuers submitted certain annual financial information to EMMA 

according to the date agreed upon in the underlying continuing disclosure agreement. The 

study excluded information about the roles and responsibilities of obligated persons in 

submitting disclosure information. A commission representative told us that 59 of the 

1,227 issuances studied were conduit issuances that, by definition, would have had an 

obligated person other than the issuer.
 

Page 12 GAO-12-698 Municipal Securities 

notices, or other information they agreed to provide in a continuing 

disclosure agreement for the lifetime of a security. For example, three 

market participants told us that issuers and obligated persons did not 

always file the annual financial information that they agreed to 

provide. Our case study of disclosures for 14 securities in EMMA 

identified similar issues in a few cases. In particular, our analysis 

found that 2 securities—a 2009 general obligation security for a small 

issuer and a 2009 conduit offering with a publicly traded corporation 

as the obligated person—had no financial or other continuing 

disclosures as of May 2012. In addition, a few market participants 

indicated that filings of event notices can be delayed significantly or 

that event notices may never be filed. For instance, one market 

participant said that he had noted cases in which issuers failed to 

report unscheduled draws on debt service or adverse tax opinions. 

Such lapses in reporting may also go undetected. As one market 

participant and a FINRA official noted, an investor or regulator may 

not be able to ascertain if a reportable event had occurred unless an 

event notice was filed with EMMA. Finally, a few market participants 

told us that issuers may provide all of the information they agreed to 

provide for the first few years after a security was issued, but 

afterwards fail to provide some of the information—for instance, tax 

data or operating information.

• Readability—Individual investors commonly cited concerns about the 

readability of disclosure documents.25 Four of the 12 individual 

investors with whom we spoke said that disclosure documents were 

not easy to read or understand. Furthermore, most individual 

investors with whom we spoke said that they generally had limited 

time to decide whether to buy a security, leaving them little time to 

research a security.26

 

25In 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.

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.

26For example, some investors said they need to make quick investment decisions when 

purchasing municipal securities in the secondary market because securities may be 

purchased by another investor within 2 hours. 
 

Page 13 GAO-12-698 Municipal Securities 

To a lesser extent, investors and other market participants identified 

additional limitations—including the lack of standardization and limitations 

of EMMA—to the usefulness of disclosure. Several market participants 

said that the lack of standardization of disclosure across different issuers 

impeded their ability to compare issuances. MSRB also stated in a 

comment letter to SEC in 2011 that many investors have told MSRB that 

the lack of standardization in disclosure is a problem.27 MSRB indicated 

that elements that market participants would like to see standardized 

included the use of bond proceeds and some basic information, such as 

the manner of reporting the name of the issuer or other obligated person 

and information on the source of repayment. Two market participants also 

told us standardization of accounting methods and the format of 

disclosures would make disclosures more useful. Also, investors and 

other market participants described several aspects of EMMA that limited 

its usefulness. Several market participants noted that the ability to search 

for issuances was limited, especially if users did not have the CUSIP

number for the issuance in which they were interested.28 Two market 

participants noted that continuing disclosures sometimes were 

categorized incorrectly by the issuer at submission to EMMA and one 

said that issuers may not submit disclosures for all issuances to which 

they applied.

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.29

 

27See Michael G. Bartolotta, “Municipal Securities Rulemaking Board’s Recommendations 

for Update of 1994 Interpretive Guidance,” MSRB comment letter to SEC, 

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 

http://www.sec.gov/comments/4-610/4610-69.pdf (Aug. 8, 2011). 

28A CUSIP number is an identification number assigned to each maturity of an issue 

intended to help facilitate the identification and clearance of securities.

29See 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).

Current Regulations 

Broadly Reflect Disclosure 

Principles but Some 

Limitations Exist
 

Page 14 GAO-12-698 Municipal Securities 

principles and municipal securities disclosure requirements). We found 

that current regulations broadly reflect the seven principles of effective 

disclosure. However, regulators and market participants have indicated 

that, in practice, limitations exist in the current regulatory scheme, 

including the areas of enforceability, content, and efficiency. In particular, 

they noted the following: 

• Allocation of accountability—Although security holders may enforce 

continuing disclosure agreements by bringing suit against the issuer 

or obligated person, SEC staff told us that they were not aware of any

public statements about any such lawsuits having occurred. Also, two 

market participants noted that market participants other than investors 

directly holding a security have no remediation should an issuer or 

obligated person not provide disclosure. SEC and MSRB cannot 

enforce continuing disclosure agreements. In a comment letter to SEC 

in 2011, MSRB stated that because Rule 15c2-12 does not impose 

penalties for noncompliance with continuing disclosure agreements, 

there is limited accountability for those issuers or obligated persons 

that do not provide the information.30 In addition, various regulatory 

incentives that could encourage issuers to comply with their 

agreements have limitations, according to regulators and market 

participants. For example, regulatory requirements to disclose at 

issuance failure to comply with prior continuing disclosure agreements 

only may work as an incentive to encourage issuers to make required 

disclosures if they anticipate issuing a new security in the future. 

Moreover, SEC staff and two market participants indicated that even if 

issuers anticipated issuing a future security they might not be 

sufficiently incentivized to keep up with their disclosure obligations 

between issuances, as some issuers may only go to market with a 

new issuance from every 3 to 5 years.31

 

30See Michael G. Bartolotta, MSRB comment letter to SEC (Aug. 8, 2011). 

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 

31SEC Rule 15c2-12 requires that final official statements contain, if applicable, a 

description of any instances in the previous 5 years in which the issuer or other obligated 

person failed to comply, in all material respects, with any previous continuing disclosure 

agreement. 
 

Page 15 GAO-12-698 Municipal Securities 

staff turnover and competing priorities in times of budgetary 

challenges. Two small issuers with whom we spoke said that they do 

not have staff dedicated to issuing and monitoring debt, which 

presents a challenge in preparing disclosures. 

• Continuing disclosure obligation—As a condition of an underwriting, 

an underwriter must reasonably determine that issuers or obligated 

persons have agreed to provide certain information on a continuing 

basis. However, this requirement is placed on the underwriter, not 

directly on the issuer of the security. Regulators and market 

participants have noted that this requirement on the underwriter is 

inefficient for several reasons. For example, representatives of two 

market participant groups told us that an underwriter often does not 

have an opportunity to influence the content of a continuing disclosure 

agreement before an issuance, although it is the underwriter’s 

responsibility to ensure the agreement specifies that all required 

information will be provided. Also, FINRA staff noted that should an 

issuer or obligated person not provide continuing disclosure 

information after a security is issued, the underwriter has no means to 

compel them to do so. Furthermore, representatives of two market 

participant groups and a former regulator have indicated that a 

disproportionate amount of the regulatory burden for municipal 

disclosure falls on underwriters. In addition, Rule 15c2-12 does not 

expressly require underwriters to document how they comply with 

requirements to reasonably determine that the issuer or obligated 

person agreed to provide continuing disclosures and that they are 

likely to comply with their continuing disclosure agreement. SEC staff 

said that without this documentation, it may be difficult for an 

underwriter to demonstrate that it met its obligations.

• Timeliness—Although Rule 15c2-12 requires, as a condition of an 

underwriting, that an underwriter must reasonably determine that 

issuers or obligated persons have specified a date by which they 

agreed to provide the annual financial report, it does not specify what 

that date should be. Therefore, issuers and obligated persons may 

provide annual financial information months after the close of the 

fiscal year.

• Use of plain English—Regulations do not require the use of plain 

English in municipal securities’ official statements or other disclosure 

documents.

SEC recognizes some of these limitations and has taken recent actions to 

improve the timeliness and completeness of continuing disclosures. 

Specifically, in June 2010, SEC amended Rule 15c2-12 and issued 

interpretive guidance to
 

Page 16 GAO-12-698 Municipal Securities 

• specify that event notices be submitted to EMMA in a timely manner 

not in excess of 10 business days of the occurrence of the underlying 

event, rather than merely “in a timely manner” as was previously 

required;

• remove the general materiality condition for determining whether 

notice of an event is to be submitted to EMMA—thereby, requiring 

that notification be provided for certain events when they occur 

regardless of whether they are determined to be material (including 

principal and interest payment delinquencies, and unscheduled draws 

on debt service reserves reflecting financial difficulties, among 

others), while adding separately a materiality condition to select 

events (including nonpayment-related defaults and bond calls);

• increase the number of events for which notice must be provided;

• remove an exemption from reporting disclosure information for certain 

variable-rate securities; and

• reaffirm its previous interpretation that underwriters must form a 

reasonable belief in the accuracy and completeness of 

representations made by issuers or other obligated persons in 

disclosures as a basis for recommending the securities, including 

making a reasonable determination that the issuer will likely provide 

the continuing disclosure information it agreed to provide.32

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 

 

32The 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.

Effect of Limitations of 

Disclosure Regulations on 

Individual Investors 

Largely Is Unknown
 

Page 17 GAO-12-698 Municipal Securities 

overall information on the extent to which individual investors in municipal 

securities rely on disclosures in making their investment decisions. 

However, anecdotal evidence suggests that individual investors’ reliance 

on disclosures could be limited. For example, 5 of the 12 individual 

investors with whom we spoke said that they relied solely on their brokerdealers’ advice when making an investment decision, while the others 

said that they conducted their own research into securities. Of the 5 

investors who said they relied solely on their broker-dealers’ advice, 2 

indicated that they did not rely on disclosures because of the difficulty of 

understanding them. Similarly, a 2008 SEC study of investor usage of 

disclosure documents for stocks, bonds, and mutual funds found that only 

2 percent of investors surveyed cited SEC-mandated disclosure 

documents—prospectuses and annual reports—as the most important 

source of investment information.33 Rather, surveyed investors most 

frequently cited financial advisors or brokers as the most important source 

of investment information.34

 

33The 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).

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 

34According 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 G17, (2) undertake a suitability determination in the case of a recommendation of a 

municipal securities transaction under MSRB Rule G-19, and (3) provide fair and 

reasonable pricing of municipal securities transactions with customers under MSRB Rules 

G-18 and G-30. SEC staff told us that EMMA is an important source of disclosure 

information for broker-dealers in relation to the advice they provide individual investors.
 

Page 18 GAO-12-698 Municipal Securities 

crisis, potentially making disclosure information a more important factor in 

their future investment decisions.

There is also limited information on the extent to which events relating to 

limitations to disclosure cited by investors—such as issuers and other 

obligated persons failing to submit information or submitting information 

late—have occurred. MSRB has limited ability to track issuances with 

missing or late disclosure for several reasons. For example, MSRB 

reported that in 2011 it received 1,879 required notices of failure to 

provide annual financial information; however, MSRB staff told us that 

they could not reliably determine the universe of issuances in EMMA for 

which annual financial information was required.35 This is because EMMA 

did not have the capability to easily or systematically differentiate 

between securities that should have disclosure submissions and those 

that are exempt from SEC Rule 15c2-12, according to MSRB staff.36

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 

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.

 

35A 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).

36MSRB staff said it can be challenging to identify securities subject to Rule 15c2-12 

disclosure requirements for a variety of reasons, including the complexity of the 

exemptions. Prior to 2011, regulations did not require that the underwriter disclose 

whether the issuance was subject to the rule. Many official statements are submitted to 

EMMA for securities that are not subject to continuing disclosure requirements.
 

Page 19 GAO-12-698 Municipal Securities 

table 1).37 In addition, municipal bankruptcy filings historically have been 

rare compared with bankruptcy filings by businesses. For 1991 through 

2009, 177 municipalities filed for bankruptcy. In contrast, more than 

49,000 businesses filed for bankruptcy in the 12-month period ending 

March 31, 2009.38

Table 1: Cumulative Average Default Rates for Municipal and Corporate Issuers (in 

Percentages), as of Year-end 2011

Standard & Poor’s Moody’s Investors Service

1 year 5 years 10 years 1 year 5 years 10 years

U.S. municipal 

issuers 

0.02 0.10 0.17 0.01 0.07 0.13

Global corporate 

issuers 

1.57 6.58 9.83 1.61 7.24 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. 

In addition, state and local government issuers have a strong incentive to 

meet their payment obligations because issuances of municipal securities

 

37Corporate 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.

38See Neil O’Hara and Securities Industry and Financial Markets Association, The 

Fundamentals of Municipal Bonds, 6th ed. (Hoboken, N.J.: John Wiley & Sons, 2012): 

174-175; and United States Courts, “Bankruptcy Filings Highest Since 2006,” May 14, 

2010, accessed May 10, 2012, at http://www.uscourts.gov/News/NewsView/10-05-

14/Bankruptcy_Filings_Highest_Since_2006.aspx. 
 

Page 20 GAO-12-698 Municipal Securities 

constitute an important tool to finance critical projects, and defaults may

hinder their ability to issue future securities and may adversely affect 

other issuers of municipal securities in the surrounding area. Defaulted 

municipal securities also have a relatively high recovery rate for investors 

compared to corporate securities, according to two rating agencies—with 

one reporting a recovery rate of 67 percent for municipal securities 

compared with 40 percent for corporate securities.39 Some states also 

have mechanisms intended to address financial crises, allowing for state 

intervention into a local government’s finances.40 Finally, 30 states have 

laws that give holders of general-obligation and certain other securities 

issued by municipalities within their states first rights to repayment from 

certain revenue streams, even during bankruptcy.41

Nevertheless, SEC and MSRB have expressed continuing concerns 

about municipal securities disclosure due to individual investors 

constituting a significant portion of the market, the size of the market, 

default risk, and incomplete disclosure. SEC staff told us that disclosure 

by municipal issuers should be improved in general as it relates to the

 

39In 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).

40Notably, 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. 

41Whether a particular security has these protections depends on the structure of the 

financing and the statutory authorization for the security. The authors conducted a 50-

state survey of rights and remedies provided by states to investors in municipal bond debt. 

See James Spiotto, Ann Acker, and Laura Appleby, Municipalities in Distress? How States 

and Investors Deal with Local Government Financial Emergencies, 1st ed. (Chicago, Ill.:

James E. Spiotto and Chapman and Cutler LLP, February 2012): 254-255.
 

Page 21 GAO-12-698 Municipal Securities 

primary market and continuing disclosure.42 In rulemakings, SEC staff

have noted concern about the size of the municipal securities market and 

that, while defaults of municipal securities are rare, they do occur. 

Furthermore, the significant pressure on state and local government 

budgets and the diminishment of bond insurance since the recent 

financial crisis have increased focus on disclosure issues, according to 

SEC and MSRB staff.43 MSRB staff noted in 2010 that although the 

municipal securities market largely weathered the 2008 financial crisis, 

economic conditions and financial liabilities continued to stress municipal 

bond issuers. SEC staff also told us that recent SEC enforcement actions 

highlight risks posed by pension funding obligations.44

 

42SEC 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 

Furthermore, SEC 

GAO-12-265. 

43Bond 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). 

44Some analysts have expressed concern in light of the recent financial downturn about 

the financial stress placed on state and local governments by pension liabilities. We 

recently reported that most state and local government pension plans have assets 

sufficient to cover their benefit commitments for a decade or more. We also found that 

states and localities have implemented various changes to their pension systems since 

2008 that were intended to help improve long-term plan sustainability. However, growing 

budget pressures will continue to challenge the ability of state and local governments to 

provide adequate contributions to help sustain their pension plans. See GAO, State and 

Local Government Pension Plans: Economic Downturn Spurs Efforts to Address Costs 

and Sustainability, GAO-12-322 (Washington, D.C.: Mar. 2, 2012).
 

Page 22 GAO-12-698 Municipal Securities 

and MSRB leadership have publicly voiced concerns about various 

aspects of the municipal securities market. Examples of their concerns 

include the following: 

• An SEC Commissioner remarked that investors may have trouble 

understanding the risks associated with increasingly complex 

structures used by large and small municipalities.45

• A former SEC Chairman stated that the opacity of the municipal 

market was unrivaled and presented a significant threat to the U.S. 

economy.46

• An SEC Commissioner was concerned that investors might not have 

access to the information they needed to accurately calculate their 

risks when making investment decisions. She stated at an SEC field 

hearing on the municipal market in 2010 that municipal market 

investors were afforded second-class treatment compared with that 

afforded to investors in other securities because they could not count 

on receiving accurate and timely financial and other material 

information about their investments.47

• MSRB stated in a comment letter to SEC in 2011 that MSRB received 

complaints about some issuers’ disregard for their continuing 

disclosure agreements and failure to provide information on time or at 

all.48

Experts and market participant groups we surveyed suggested a number 

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.

 

45See 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).

46See Arthur Levitt Jr., “Muni Bonds Need Better Oversight,” Wall Street Journal (May 9, 

2009).

47See Elisse B. Walter, “Statement at SEC Field Hearing on the State of the Municipal 

Securities Market,” (San Francisco, California: Sept. 21, 2010).

48See Michael G. Bartolotta, MSRB comment letter to SEC (Aug. 8, 2011).

Options for Improving 

Disclosure Involve 

Potential Benefits and 

Challenges
 

Page 23 GAO-12-698 Municipal Securities 

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.

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 

Some Options Identified to 

Improve Disclosure Would 

Require Statutory Changes

Many Survey Respondents 

Suggested Repealing the Tower 

Amendment, but Regulators 

Said It Would Have No Effect 

on Disclosure
 

Page 24 GAO-12-698 Municipal Securities 

corporate issuers do not apply to municipal securities offerings. In 

addition, the periodic reporting requirements of the Exchange Act do not 

apply to issuers of such municipal securities. MSRB does not otherwise

have affirmative authority to regulate municipal issuers. As a result, SEC 

and MSRB staff told us that Congress may need to provide SEC or 

MSRB with affirmative authority or amend exemptions under federal 

securities laws to establish disclosure requirements directly on municipal 

securities issuers.49

Four market participant groups we surveyed and others (including 

issuers) with whom we spoke discussed potential challenges to issuers of 

expanding regulator authority. They expressed concern over the costs of 

federal regulation as well as the potential infringement on state and local 

government rights. According to a market participant group with whom we 

spoke, an increase in the costs of accessing the market could prohibit 

some issuers from raising capital in the public market and lead some 

issuers to pursue other options for raising capital, such as through private 

bank loans. In addition, a market participant group representing issuers 

said the basic tenets of federalism and the importance of federal-state 

comity behind the Tower Amendment were important considerations in 

weighing potential options for improving municipal disclosure.

While neither SEC nor MSRB had indicated to us they were seeking 

additional authority to regulate issuers, SEC staff indicated that additional 

authority would be helpful to improve disclosure by municipal issuers. 

Staff of each regulator had similar views on how to most appropriately 

use any additional authority that could be granted to regulate disclosure 

by municipal issuers.

• First, staff generally agreed that the securities registration regime for 

public companies would be inappropriate for the municipal securities 

market. With approximately 50,000 issuers and 1.3 million separate 

outstanding securities, SEC staff said the additional resources 

potentially needed to review and declare effective registration 

statements would be extensive, and an MSRB official said regulating 

 

49SEC staff expect to release a staff report on the municipal securities market in 2012 that 

includes legislative, regulatory, and industry best practices and recommendations to SEC 

Commissioners for measures to improve primary and secondary market disclosure 

practices, measures to improve market practices, and associated regulation.
 

Page 25 GAO-12-698 Municipal Securities 

municipal issuers would be beyond MSRB’s current resource 

capabilities.

• Second, SEC and MSRB staff recognize that potential continuing 

disclosure requirements could have costs for issuers, such as small or 

infrequent issuers, although limited information exists on the universe 

of issuers, and issuers that might be affected.

• Third, SEC and MSRB staff told us broad-based or marketwide 

standardized disclosure would not be favorable for the municipal 

market. Rather, SEC staff told us disclosure requirements could be 

principles-based. Principles-based disclosure is an approach that 

would involve establishing key objectives of good reporting and 

providing guidance and examples to explain each objective. MSRB 

staff agreed that disclosure requirements should be tailored, noting 

that the market is highly diverse in terms of the structure of financings 

and the issuing community. Staff from both regulators said any 

disclosure requirements for municipal securities issuers would need to 

reflect the diversity of issuers as well as the federal interest in investor 

protection.

• Fourth, SEC and MSRB staff stated that regulation of municipal 

securities must balance investor protection and intergovernmental 

comity. For example, SEC staff told us any federal regulation of 

municipal securities disclosure should be flexible and adaptable, so 

that regulators could account for issues of comity and other political 

realities present in the municipal market.

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 

Additional Options for 

Improving Disclosure Would 

Require Other Statutory 

Changes 
 

Page 26 GAO-12-698 Municipal Securities 

GAAP for state and local governments.

50

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.

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.

51

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 

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.

 

50GASB establishes GAAP for state and local governments. However, issuers of 

municipal securities are not required to prepare financial statements according to GAAP.

51See GAO, Dodd-Frank Wall Street Reform Act: Role of Governmental Accounting 

Standards Board in the Municipal Securities Markets and Its Past Funding, GAO-11-267R 

(Washington, D.C.: Jan. 18, 2011).
 

Page 27 GAO-12-698 Municipal Securities 

requirement to follow GAAP would be an unfunded mandate, particularly 

for small or infrequent borrowers because they would be required to 

invest in the staff time and expertise to prepare financial statements they 

would not otherwise prepare.52

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.

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.

53

 

52Because of the number of issuers—estimated at more than 50,000—our examples only 

illustrate categories of costs that could affect issuers.

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 standard53SEC has statutory authority to establish financial accounting and reporting standards for 

publicly held companies, but has looked to private-sector standard-setting bodies to 

develop these accounting principles and standards. For example, SEC had recognized the 

Accounting Principles Board as the authoritative source for GAAP until 1973. Since the 

formation of the Financial Accounting Standards Board (FASB) in 1973, SEC has 

designated FASB as the private-sector standard-setter whose accounting principles are 

recognized as “generally accepted” for purposes of federal laws for public companies. The 

Sarbanes-Oxley Act of 2002 established criteria that must be satisfied for the work product 

of an accounting standard-setting body to be recognized as “generally accepted.” 

Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 108, 116 Stat. 745 (2002). In 2003, 

SEC reaffirmed FASB as the private-sector standard setter. Commission Statement of 

Policy: Reaffirming the Status of the FASB as a Designated Private-Sector Standard 

Setter, Securities Act Release No. 8221, Exchange Act Release No. 47,743 (Apr. 25, 

2003).
 

Page 28 GAO-12-698 Municipal Securities 

setting body, such as GASB, as “generally accepted.”54 In a 2010 speech 

at a securities regulation seminar, the Commissioner identified options for 

improving municipal securities disclosure that SEC would examine in an 

ongoing review of the municipal securities market.55

Require Time Frames for Annual Reporting

They included

mandating the use of uniform accounting standards, such as GAAP 

standards.

Four of 21 experts and 4 of 21 market participant groups we surveyed, 

and 2 market participant groups we interviewed, suggested that federal 

regulators should require issuers to submit annual financial statements 

and operating information on a timely basis. Suggestions included that 

state and local government issuers should meet a standard of 120 or 180 

days, or adhere to the same standard as corporate issuers.56

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 

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.

 

54See Elisse B. Walter, “Regulation of the Municipal Securities Market: Investors Are Not 

Second-Class Citizens” (New York, N.Y.: Oct. 28, 2009).

55See Elisse B. Walter, “Remarks before the Forty-third Annual Regulation Securities 

Seminar,” (Los Angeles, Calif.: Oct. 29, 2010).

56Corporate issuers adhere to a 60-, 75-, or 90-day reporting standard based on their size 

and market capitalization.
 

Page 29 GAO-12-698 Municipal Securities 

frames.57 A state conduit issuer said some issuers might rely on a state to 

reconcile Medicare payments after the close of the fiscal year before they 

could report GAAP-compliant financial statements. In addition, some 

issuers said a limited availability of auditors of governmental entities could 

impede issuers from complying with a mandated annual reporting time 

frame.58

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.

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.

Require Quarterly Reporting

Three market participant groups we interviewed and 1 of 21 market 

participant groups we surveyed told us federal regulators should require 

 

57Component 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. 

58By auditors of governmental entities, we mean both government auditors and privatesector auditors of governmental entities.
 

Page 30 GAO-12-698 Municipal Securities 

issuers to disclose unaudited financial information on a quarterly basis in 

EMMA, similar to requirements for corporate issuers. According to 3 

market participant groups, more frequent reporting could help provide 

investors with more timely, relevant information.

Four of seven large issuers and three of six small issuers told us they 

posted interim financial information to their websites, including unaudited 

quarterly financial statements and budget reports. Three other small 

issuers that produced interim financial reports told us they did not post 

such information on their websites, but could provide it to investors or 

others on request. Issuers that already produce interim financial 

information could face minimal cost to submit it to EMMA. Additionally, 

members of a market participant group representing issuers said 

unaudited interim financial information might be easier for issuers to 

prepare than annual audited financial reports (for issuers that fulfill their 

annual reporting obligation as agreed in their continuing disclosure 

agreement by providing audited annual financial statements) and provide 

investors with more current and relevant information. One market 

participant group representing issuers told us smaller issuers could have 

a greater incentive to disclose interim financial information for the benefit 

of investors out of competitive pressure as more issuers adopted the 

practice.

However, issuers and a market participant group indicated that a 

requirement for issuers to provide quarterly information to EMMA could 

be costly, would involve liability concerns, and could result in a limited 

presentation of financial information that excludes information on accrued 

assets and liabilities. Some large, small, and conduit issuers with whom 

we spoke said preparing interim financial information for EMMA would 

require additional staff resources and, with governments’ limited 

resources, likely would result in issuers reallocating staff resources from 

other areas. For example, several large issuers and conduit issuers told 

us they and others would need to hire additional accounting staff if 

required to provide standardized quarterly financial reports. Large and 

small issuers also cited concerns about their liability under SEC’s 

antifraud authority of posting unaudited financial information to EMMA, 

and a market participant group suggested that issuers would be more 

willing to disclose interim information if they could disclaim liability from 

the antifraud provisions of the federal securities laws. SEC staff told us 

that issuers and others cannot disclaim liability or responsibility for their 

disclosures under the antifraud provisions. Finally, several large and 

small issuers with whom we spoke and 1 of 21 market participant groups 

we surveyed said significant adjustments that some government entities 
 

Page 31 GAO-12-698 Municipal Securities 

make only at year-end to meet GAAP requirements would make it 

infeasible to determine an issuer’s financial condition from interim 

financial reports, as interim information would provide an incomplete 

picture of an issuer’s financial condition.

In a 2010 speech to the Investment Company Institute, the SEC 

Chairman stated that requiring periodic disclosure of financial 

information—such as tax revenues, expenditures, tax base changes, or 

pension obligations—could help improve municipal securities 

disclosure.59

Require Certain Conduit Borrowers to Comply with Corporate 

Disclosure Requirements

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-sizefits-all requirement for issuers to provide more frequent disclosure 

information.

Four of 21 experts and 1 of 21 market participant groups we surveyed 

and several issuers we interviewed said SEC should require corporate 

borrowers that issue debt in the municipal market to comply with 

disclosure requirements for corporate issuers because this sector has 

been responsible for most payment defaults.60

 

59See 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). 

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 

60Survey respondents and issuers with whom we spoke did not advocate changes to the 

exemption for nonprofit conduit borrowers.
 

Page 32 GAO-12-698 Municipal Securities 

SEC from requiring prefiling information from municipal securities issuers, 

the restriction does not apply to conduit borrowers, as they are not 

municipal securities issuers. Whether a corporate conduit borrower is 

subject to registration and reporting requirements for public companies 

would depend on whether the corporate conduit borrower qualified for a 

specific exemption under the Securities Act.

Two market participant groups and an expert with whom we spoke 

suggested that applying corporate disclosure requirements to conduit 

borrowers would provide a risk-based approach to improving disclosure. 

They said focusing changes of disclosure rules on the highest-risk sectors 

of the market would improve investor protection in the areas of greatest 

need. One expert we surveyed said conduit borrowers should be required 

to provide investors with more information because conduit borrowers 

benefit financially from reduced interest rates on tax-exempt municipal 

bonds. The expert said eliminating exemptions for corporate borrowers 

could provide clarity to investors on what entities issue debt in the 

municipal market, and could provide investors with access to the same 

registration and disclosure information that otherwise would be available 

on the same entities if issuing securities in the corporate market. While 

eliminating exemptions for conduit borrowers could improve transparency, 

one small issuer told us there could be some costs to government 

issuers, as some local governments may be required to assume 

development costs. Conduit issuers agreed that eliminating exemptions 

could increase costs to conduit borrowers and cause some to leave the 

market—in theory, leading to lost economic development opportunities.

SEC staff have recommended that the exemption provided by Section 

3(a)(2) of the Securities Act be eliminated for corporate conduit 

borrowers.61

 

61Statement 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).

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 
 

Page 33 GAO-12-698 Municipal Securities 

municipal securities with conduit borrowers in some sectors have been 

less compliant with continuing disclosure agreements than other types of 

municipal securities. They said planned improvements to EMMA could 

help users identify and track conduit issuances, which could aid conduit 

borrowers in managing their continuing disclosure obligations or help 

regulators and investors track securities with conduit borrowers.

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.

Six market participant groups with whom we spoke and 4 of 21 experts 

and 3 of 21 market participant groups we surveyed told us EMMA was a 

significant improvement from the former system for distributing disclosure, 

and 2 market participant groups said its usefulness had improved since it 

was first implemented. Members of a group representing issuers said the 

system provided issuers greater certainty about their compliance with 

continuing disclosure agreements, as EMMA allows issuers to verify what 

information they submitted to the system and where it was posted online. 

When using the former system, issuers mailed in paper documents and 

lacked the ability to see whether information was filed or if it had been 

categorized correctly. They said EMMA had made it easier to more 

accurately file disclosure information, as it was easier to associate 

disclosure information with appropriate identifiers (CUSIP numbers).

Nevertheless, 6 market participant groups we interviewed and 3 of 21 

market participant groups and 2 of 21 experts we surveyed suggested 

further improvements to EMMA could benefit disclosure.62

 

62MSRB has issued a long-range plan for further developing the EMMA system, which we 

discuss later in this report.

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 

Other Options for 

Improving Continuing 

Disclosure Could Be 

Achieved within Existing 

Regulatory Framework

Improve and Promote EMMA
 

Page 34 GAO-12-698 Municipal Securities 

properly coded to appropriate categories and securities. According to one 

market participant group with whom we spoke, further improving EMMA’s 

functionality would reduce the time and level of effort required of EMMA 

users to understand the significance of the information provided. Two 

market participant groups representing issuers told us that while EMMA 

has made it easier for them to manage their investor disclosures and 

determine whether disclosures are publicly available, additional 

improvements would further increase the functionality and usefulness of 

the system. MSRB staff agreed that further improving EMMA would 

encourage greater issuer discipline in complying with continuing 

disclosure agreements, because functionality improvements to EMMA 

could provide investors better access to disclosure information and, in 

turn, increase investor demand for disclosure in EMMA.

Four of 21 market participant groups we surveyed and 3 others with 

whom we spoke said regulators could strengthen efforts to educate 

issuers on their disclosure responsibilities. For instance, three market 

participant groups we interviewed told us some issuers have not yet 

submitted information to EMMA because they might not be aware of their 

disclosure obligations under their continuing disclosure agreements. 

Regulators discussed with us their efforts to educate issuers about 

EMMA. MSRB’s primary education focus for the first year after launching 

EMMA was to inform and train issuers on their new obligations to file 

disclosure information to EMMA. According to MSRB staff, these efforts 

included providing industry conference presentations, developing 

webinars, creating a call center to provide support to issuers submitting 

information to EMMA, and posting a list of frequently asked questions on 

the MSRB website. While these efforts have continued, MSRB has 

updated its issuer education focus from introducing EMMA to how to 

leverage EMMA to communicate directly with investors. In November 

2011, MSRB launched a toolkit for state and local government issuers on 

its website, which included information on making continuing disclosure 

submissions to EMMA and how issuers can better use the information 

available on EMMA. While MSRB staff view MSRB’s initial issuer 

education efforts as successful because frequent issuers are aware of 

EMMA and MSRB received positive feedback from the issuer community, 

they said additional work was needed to educate infrequent, small 

issuers.

Four of 21 market participant groups and 1 of 21 experts we surveyed 

also suggested that regulators could strengthen efforts to improve 

investor awareness of EMMA, as the extent to which individual investors 

use EMMA is difficult to ascertain. More specifically, 7 of the 12 individual 
 

Page 35 GAO-12-698 Municipal Securities 

investors with whom we spoke did not use EMMA to obtain disclosure 

information because a few said they were not aware of EMMA and 

several said they relied on advisors for investment advice and information 

instead of conducting their own research.

Regulators said they expected investor awareness of EMMA to improve 

over time, and described the extent of their efforts to make investors 

aware of EMMA. In 2009, MSRB initiated an education and outreach 

effort to raise awareness of EMMA among investors and others who act 

on their behalf, and to promote use of the site by market participants. 

MSRB has used websites, social media, search engines, print and 

broadcast media, and public speaking engagements, among other things, 

to communicate to investors, issuers, and the broker-dealer community 

about EMMA. MSRB also requires that trade confirmations or other 

documentation associated with primary market transactions provide 

notice that primary offering disclosure information (official statements) is 

available through EMMA. Further, MSRB developed an online education 

center and in May 2012 launched an investor toolkit on its website. MSRB 

staff told us they plan to develop focus groups of investors to explore 

ways to improve EMMA, which could include how to improve investor 

education efforts. Additionally, SEC, FINRA, and others have promoted 

EMMA on various websites relevant to investors interested in purchasing 

municipal securities.

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 

Expand SEC Enforcement 

Activities
 

Page 36 GAO-12-698 Municipal Securities 

main sources of guidance for preparing or advising issuers about 

disclosure information.

To be held liable under the antifraud provisions, issuers must make a 

material misstatement or omission in their disclosures or public 

statements (such as to EMMA or in a speech).63 SEC has initiated 

enforcement actions against state and local governments for materially 

false and misleading disclosures they provided to investors in connection 

with publicly offered municipal securities. For example, SEC found that 

the State of New Jersey and the City of San Diego violated antifraud 

provisions by misstating or omitting material information about the annual 

funding of their pension obligations, which SEC alleged to be material 

information on which investors would rely.64

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.

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. 

Three of 21 market participant groups we surveyed and a market 

participant group and an investor with whom we spoke said additional 

 

63SEC 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.

64See 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).

Provide Guidance to Help 

Standardize Disclosure
 

Page 37 GAO-12-698 Municipal Securities 

guidance or templates could improve the readability and comparability of 

information disclosed in EMMA, improving investors’ understanding of the 

information. Additionally, an expert said such guidance, outlining broad 

categories of basic information all issuers should provide, would be 

particularly helpful to small or infrequent issuers that lack the resources 

needed to maintain an awareness of industry changes in disclosure 

standards. However, many large, small, and conduit issuers with whom 

we spoke identified potential challenges to providing standardized 

information. They said standardized formats could require different 

information from what is collected and maintained now, requiring changes 

that could impose additional costs on issuers through increased staff 

time, hiring additional expertise, and associated opportunity costs. Also, 1 

of 21 market participant groups we surveyed was concerned that direct 

regulation of disclosure content and format by SEC or MSRB could have 

an adverse effect on the quality of disclosure information. That is, 

standardized information might provide investors with information that 

was too general to be useful.

SEC staff said they have been exploring different ideas to assist 

municipal issuers in improving disclosure as part of the staff’s ongoing 

review of the municipal securities market. For example, SEC staff told us 

SEC could consider having a role in helping issuers determine what types 

of information would be useful for investors’ decision making. While 

MSRB had not specifically discussed developing templates for disclosure 

in its long-range plan for EMMA, staff told us MSRB could consider 

possible options to help standardize disclosure using its authority over 

how information gets submitted to EMMA. MSRB staff told us examples 

could include creating a template for baseline disclosure such as an 

online form for submitting information to EMMA, or providing guidance or 

best practices to show patterns of good disclosure and highlight good 

disclosure practices. Staff also suggested MSRB could consider 

developing an online library of links to websites with guidance and best 

practices developed by industry groups and regulators.

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 

Require Use of Plain English
 

Page 38 GAO-12-698 Municipal Securities 

financial report prepared in accordance with GASB rules provide a 

management discussion and analysis.65

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.

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 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 

 

65GASB 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. 

MSRB and SEC Have Been 

Taking Steps to Address 

Some Options
 

Page 39 GAO-12-698 Municipal Securities 

displayed in EMMA, making lapses in annual disclosure more 

transparent to users.66

• Voluntary information—MSRB also developed features in EMMA that 

allow issuers to submit different types of information on a voluntary 

basis, including monthly budget updates. Additional changes, which 

became effective May 2011, permit issuers, obligated persons, and 

parties providing disclosure on their behalf, to provide to EMMA 

additional categories of information including specifying a timeframe 

of 120 or 150 days for submitting annual financial information, 

indicating use of GAAP as established by GASB or Financial 

Accounting Standards Board (FASB), or providing a web address 

(URL) where additional financial information is available.67

• 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.

An issuer’s 

agreement to participate in any of these voluntary undertakings would 

be prominently displayed in EMMA.

68

In addition to these recent efforts, in January 2012, MSRB issued its longrange plan for further developing the EMMA system.

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.

69

 

66MSRB 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).

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 

67Issuers 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.

68MSRB 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.

69See MSRB, Long-Range Plan for Market Transparency Products (Jan. 27, 2012), 

available at http://www.msrb.org/About-MSRB/Programs/Long-Range-Plan-for-MarketTransparency-Products.aspx. 
 

Page 40 GAO-12-698 Municipal Securities 

feedback through the EMMA website. MSRB’s long-range plan includes 

improving search capabilities to make it easier for investors to find 

securities. Planned changes would allow users to find specific securities 

information using information other than CUSIP numbers, such as 

keywords, map-based information, or hierarchy-based searches (for 

example, securities within a given state), and would allow users to 

conduct advanced searches within disclosure documents. The plan also 

includes ongoing work with the issuer community to develop additional 

tools and utilities to help issuers manage their debt portfolios and to 

promote more comprehensive and timely disclosure. For example, MSRB 

plans to develop more flexibility for issuers to manage disclosure 

submissions and their appearance in EMMA. These new EMMA 

capabilities could enable issuers to compare the disclosure and 

performance of their securities with their peers’ securities. MSRB also 

plans to continue promoting awareness of EMMA and provide additional 

online education information for investors, including how to work with 

advisors, access pricing information, and use EMMA.

SEC’s ongoing study of the state of the municipal securities market has 

focused on a range of issues such as primary and secondary market 

disclosure practices, financial reporting and accounting, investor 

protection and education, and market structure (including pretrade price 

transparency).70

 

70As 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 

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 

GAO-12-265. Instead, staff held a number of “mini muni” 

meetings, with a variety of municipal securities market stakeholders at SEC’s offices.
 

Page 41 GAO-12-698 Municipal Securities 

Municipal Securities director and staff. SEC’s fiscal year 2012 budget 

provides for five full-time staff; however, as of April 2012, the office had 

three employees.

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

comment. SEC and MSRB provided technical comments, which we 

incorporated, as appropriate. FINRA did not provide comments on the 

draft report. 

We are sending copies of this report to the Senate Committee on 

Banking, Housing, and Urban Affairs and the House Committee on 

Financial Services. In addition, the report is available at no charge on the 

GAO website at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact 

me at (202) 512-8678 or clowersa@gao.gov. Contact points for our 

Offices of Public Affairs and Congressional Relations may be found on 

the last page of this report. GAO staff who made key contributions to this 

report are listed in appendix V. 

A. Nicole Clowers

Director

Financial Markets and Community Investment

Agency Comments
Appendix I: Objectives, Scope, and 

Methodology

Page 42 GAO-12-698 Municipal Securities 

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 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 43 GAO-12-698 Municipal Securities 

securities. We also interviewed institutional investors (including 

representatives for eight investment companies), professional analysts, a 

rating agency, an independent research firm, and groups representing 

market participants, including broker-dealers, bond lawyers, and 

municipal advisors. Finally, we interviewed staff of federal and state 

regulators, including SEC, MSRB, the Financial Industry Regulatory 

Authority (FINRA), and the North American Securities Administrators 

Association.

To describe the extent to which the information that issuers must provide 

reflects principles for effective disclosure, we reviewed federal laws and

rules, agency regulations, and interpretive guidance that set forth 

disclosure requirements related to municipal securities. We reviewed 

SEC Rule 15c2-12, the primary SEC rule relating to underwriters of 

municipal securities. We reviewed information on SEC regulations for 

insider trading and that establish fair disclosure requirements for 

corporate securities to determine their applicability to municipal securities. 

We also reviewed SEC’s antifraud authorities in the Securities Act of 

1933 and the Securities Exchange Act of 1934, as well as provisions of 

these acts that exempt municipal securities from SEC registration and 

periodic reporting requirements. In addition, we reviewed MSRB’s facility 

filing on EMMA, which establishes requirements for submitting disclosure 

information to the system. We compared these requirements with 

principles for effective disclosure and had two analysts review and come 

to independent judgments to determine the extent to which disclosure 

regulations reflected the principles. We used two sources for criteria. 

First, we used Principles for Ongoing Disclosure and Material 

Development Reporting by Listed Entities from the International 

Organization of Securities Commissions.1

 

1

International Organization of Securities Commissions, Principles for Ongoing Disclosure 

and Material Development Reporting by Listed Entities (October 2002). 

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 
Appendix I: Objectives, Scope, and 

Methodology

Page 44 GAO-12-698 Municipal Securities 

largely domestic and the securities do not trade on exchanges. Second, 

we used SEC’s A Plain English Handbook: How to Create Clear SEC 

Disclosure Documents, which sets forth principles for preparing 

disclosure documents in easy-to-understand language.2

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 

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.

 

2

SEC, A Plain English Handbook: How to Create Clear SEC Disclosure Documents

(Washington, D.C.: August 1998).
Appendix I: Objectives, Scope, and 

Methodology

Page 45 GAO-12-698 Municipal Securities 

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.
Appendix II: Key Federal Disclosure 

Requirements for Publicly Offered Municipal 

and Corporate Securities 

Page 46 GAO-12-698 Municipal Securities 

Table 2 compares key federal disclosure requirements for municipal and 

corporate securities. The information in the table is organized according 

to whether requirements apply to primary or secondary market disclosure, 

with requirements that apply to both presented first. 

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

June 2012 

Key federal disclosure 

requirement Municipal Corporate 

Applicability of antifraud 

provisionsa Yes 

SEC is authorized to take enforcement actions 

against any person or entity that violates antifraud 

provisions. 

Yes 

SEC is authorized to take enforcement actions 

against any person or entity that violates antifraud 

provisions. 

Use of generally accepted 

accounting principles 

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). 

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. 

Appendix II: Key Federal Disclosure 

Requirements for Publicly Offered Municipal 

and Corporate Securities 
Appendix II: Key Federal Disclosure 

Requirements for Publicly Offered Municipal 

and Corporate Securities

Page 47 GAO-12-698 Municipal Securities 

Key federal disclosure 

requirement Municipal Corporate

Regulatory review No

SEC is not authorized to require municipal issuers 

to file presale information with SEC prior to the sale 

of municipal securities. 

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. 

Disclosure repository Yes

MSRB maintains EMMA (Electronic Municipal 

Markets Access), an online repository for 

disclosures. 

Yes

SEC maintains EDGAR (Electronic Data 

Gathering Analysis and Retrieval), an online 

repository for disclosures. 

Exemptions 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:

• principal amount is less than $1 million;

e

• 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.

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. 

SEC registration No

The Securities Act of 1933 exempts municipal 

securities from registration requirements. 

Yes

Offers and sales of securities must be registered 

under the Securities Act of 1933 unless an 

exemption is available. 
Appendix II: Key Federal Disclosure 

Requirements for Publicly Offered Municipal 

and Corporate Securities 

Page 48 GAO-12-698 Municipal Securities 

Key federal disclosure 

requirement Municipal Corporate

Primary offering 

disclosure

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. 

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. 

Continuing or secondary 

market disclosure content 

requirement

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.

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.

f

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. 

g

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. 

Secondary market 

disclosure format 

requirement

Limited

MSRB requires EMMA submissions in portable 

document format and to be accompanied by certain 

indexing information. 

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. 
Appendix II: Key Federal Disclosure 

Requirements for Publicly Offered Municipal 

and Corporate Securities 

Page 49 GAO-12-698 Municipal Securities 

Key federal disclosure 

requirement Municipal Corporate

Secondary market 

disclosure timing 

requirement

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. 

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, GAAPbasis 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). 
Appendix III: Principles of Effective Disclosure 

Compared with Current Disclosure 

Regulations for Municipal Securities 

Page 50 GAO-12-698 Municipal Securities 

We compared requirements for continuing disclosure in the Securities

and Exchange Commission’s (SEC) Rule 15c2-12 and SEC’s antifraud 

authorities with principles for effective disclosure that were developed by 

an international organization of securities commissions, which included 

SEC, and certain plain English principles developed by SEC.1

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

We found 

that the current municipal securities disclosure requirements broadly

reflect the seven principles for effective disclosure.

Principle Is this principle reflected in regulation?

Allocation of accountability

The issuer or obligated person is responsible for 

compliance with the continuing disclosure obligation. 

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. 

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. 

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. 

Disclosure criteria

Continuing disclosure of information should be fairly 

presented, not be misleading or deceptive, and contain 

no material omission of information. 

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. 

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. 

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. 

 

1

See International Organization of Securities Commissions, Principles for Ongoing 

Disclosure and Material Development Reporting by Listed Entities (October 2002). See 

also SEC, A Plain English Handbook: How to Create Clear SEC Disclosure Documents

(Washington, D.C.: August 1998). While municipal issuers are not required to follow these 

principles, we believe the International Organization of Securities Commissions criteria are 

relevant because our data collection indicated that continuing disclosure was a key issue 

for municipal securities disclosure. Although trading of municipal securities in the 

secondary market is infrequent, trading volume is substantial, indicating the importance of 

continuing disclosure.

Appendix III: Principles of Effective Disclosure 

Compared with Current Disclosure Regulations 

for Municipal Securities
Appendix III: Principles of Effective Disclosure 

Compared with Current Disclosure 

Regulations for Municipal Securities 

Page 51 GAO-12-698 Municipal Securities 

Principle Is this principle reflected in regulation?

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. 

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. 

Timeliness

Issuers or obligated persons should disclose ongoing 

information on a timely basis, including:

• prompt disclosure of material developments, and

• annual information.

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. 

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. 

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. 
Appendix IV: Pension Liability Reporting 

Page 52 GAO-12-698 Municipal Securities 

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 longterm contracts) for a minimum of 5 years beyond the reporting 

period.1

 

1

GASB, Preliminary Views of the Governmental Accounting Standards Board on Major 

Issues Related to Economic Condition Reporting: Financial Projections, No. 13-3 (Nov. 

29, 2011).

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

Appendix IV: Pension Liability Reporting
Appendix IV: Pension Liability Reporting 

Page 53 GAO-12-698 Municipal Securities 

compliant with generally accepted accounting principles, or GAAP (for 

those entities that can choose whether to comply with GAAP).2

• In May 2012, the National Association of Bond Lawyers issued 

guidance to help issuers provide disclosures about their pension 

funding in primary offering documents, or official statements.3

• In June 2012, GASB approved standards that amend accounting and 

financial reporting on pension plans.

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.

4

 

2

These board members suggested alternatives, including broadening standards for 

reporting historical information and information about how to obtain the subsequent year’s 

budget. They said this information could provide an indication of the future of a 

governmental entity and that historical data help users to make conclusions about a 

government’s ability to continue to provide its current level of service.

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 

3

National Association of Bond Lawyers, Considerations in Preparing Disclosure in Official 

Statements Regarding an Issuer’s Pension Funding Obligations, (May 15, 2012). 

Available at 

http://www.nabl.org/uploads/cms/documents/pension_funding_obligations_document_5-

18-12_b.pdf, as of May 18, 2012.

4

The revised standards, approved as Statements 67 and 68, replaced previous pension 

plan reporting standards (Statements 25, 27, and 50). Specifically, Statement 67 revised 

guidance for the financial reports of most pension plans, effective for periods beginning 

after June 15, 2013, and Statement 68 established new financial reporting requirements 

for most governments that provide their employees with pension benefits, effective for 

fiscal years beginning after June 15, 2014.
Appendix IV: Pension Liability Reporting 

Page 54 GAO-12-698 Municipal Securities 

appropriate way to measure and accrue cost for these obligations) 

had become widely divergent.5

 

5

See GASB, Accounting and Financial Reporting for Pensions: An Amendment of GASB 

Statement No. 27, No. 34-E (June 27, 2011) and Financial Reporting for Pension Plans: 

An Amendment of GASB Statement No. 25, No. 34-P (June 27, 2011).
Appendix V: GAO Contact and Staff 

Acknowledgments

Page 55 GAO-12-698 Municipal Securities 

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

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.

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments

(250616)
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