Remarks of Lynnette Kelly, Executive Director. to the. Washington University Global Masters of. Finance/ Singapore Management University

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1 Remarks of Lynnette Kelly, Executive Director to the Washington University Global Masters of Finance/ Singapore Management University Brookings Institution - Washington, DC May 22, 2015

2 INTRODUCTION Good afternoon and thank you, Richard, for the opportunity to come speak to your students. I m Lynnette Kelly, Executive Director of the Municipal Securities Rulemaking Board. My entire career has been in public finance, and it s a pleasure to speak with students passionate about pursuing careers the financial markets. I have worked mostly in the States, but did have the opportunity to spend time in London as a securities lawyer where I advised on sovereign bond transactions and infrastructure finance. Infrastructure finance of course occurs around the world but in the United States, the construction of bridges, roads, schools and other public works is primarily financed with municipal bonds. The municipal securities market is a uniquely American invention, one that builds on the concept of federalism, which allows local governments to make their own decisions about the public projects they need to finance. And they have been using municipal bonds to do so since the 1800s. Today the municipal market represents about $3.6 trillion in outstanding debt. And by many measures, the market functions exceptionally well as a means of bringing together communities that need to finance infrastructure needs with investors that want tax-exempt income. In fact, the U.S. municipal market has served as a model for other nations, including India and China, seeking efficient and effective means of financing infrastructure. So today I want to help you understand a bit about the regulatory framework for this key, well-functioning capital market in the United States. I ll start by giving you just a brief overview of the MSRB, which is the principal regulator in this market. 2

I have worked mostly in the States, but did have the opportunity to spend time in London as a securities lawyer where I advised on sovereign bond transactions and infrastructure finance.

3 Then I ll highlight some of the key ways we support the fair and efficient operation of the muni market, from regulating municipal market professionals to supporting market transparency and providing education, outreach and market leadership. WHAT IS THE MSRB? First let me introduce who we are and what we do at the MSRB. The MSRB is an independent self-regulatory organization for the municipal securities industry authorized by federal law to make rules for municipal securities brokers, dealers and advisors. We were created by the U.S. Congress in 1975 when it decided that it needed to protect investors in municipal bonds from fraud and other potential market manipulation. Congress authorized the MSRB to develop rules of professional conduct and establish qualification requirements for the underwriters of municipal securities. The MSRB s legal jurisdiction was actually expanded in 2010 when Congress determined that state and local governments also required protection in the municipal securities market. And so the MSRB undertook the additional regulation of individuals who advise municipalities on the issuance of municipal securities. We now have jurisdiction to regulate municipal securities dealers and municipal advisors, which play a key role in the issuance and trading of municipal bonds. Importantly, the MSRB does not regulate issuers of municipal securities. States and municipalities are considered to have a constitutional right as sovereign powers to freely access the capital markets. There is that system of federalism I mentioned. However, one of the interesting aspects of the U.S. federal securities law is that it does impose some disclosure requirements on municipal bond issuers, indirectly through their relationship with underwriters. 3

The MSRB is an independent self-regulatory organization for the municipal securities industry authorized by federal law to make rules for municipal securities brokers, dealers and advisors.

4 And those disclosures, which include bond offering documents and updated financial information, are made available to investors through a website operated by the MSRB, called EMMA. So with that brief overview, I d like to provide a little more detail on the regulation of the municipal securities market, As you can see, it s quite the alphabet soup. I understand you have had the opportunity to meet with a number of organizations in DC this week. Our primary relationship is with the Securities and Exchange Commission, which oversees our activities and reviews and determines whether to approve MSRB rule proposals. Upon SEC approval, an MSRB rule has the force and effect of federal law. The MSRB does not enforce its rules or conduct compliance examinations. The MSRB instead works with the SEC, the Financial Industry Regulatory Authority and bank regulators to support their examination and enforcement activities. The MSRB also has more informal collaborations with the Internal Revenue Service, state securities regulators and other federal government agencies. REGULATION Let s talk briefly about the MSRB s regulatory activities. The MSRB s rule book is primarily principles-based. Our dealer rules many of which have been on the books for nearly 40 years -- establish core responsibilities to: o Register with the MSRB o Meet baseline standards of professional qualification 4

I understand you have had the opportunity to meet with a number of organizations in DC this week.

5 o Act fairly o Conform to certain business conduct and uniform practice standards o And provide transparency around their market activities. Even after four decades of writing rules for dealers, the MSRB continues to add to and amend its rulebook in light of evolving market practices. For example, we recently established a new rule requiring best execution of municipal transactions to help ensure that investors are getting a favorable price from their broker. This rule supplements existing and long-standing fair practice regulations that ensure the fair treatment of investors. Rules for municipal advisors are still under construction. As I mentioned earlier, in 2010 Congress charged the MSRB with regulating professionals that provide advice to state and local governments on municipal finance transactions. To fulfill this new mandate, the MSRB began to create a new regulatory framework including rules of conduct and professional qualification for municipal advisors. To date, the MSRB has focused on the most critical areas of rulemaking for municipal advisors, including: o Supervisory and compliance obligations o Professional qualifications o Core standards of conduct o And conflicts of interest arising from pay-to-play activities or excessive gifts. All of these proposals are making their way through the rulemaking process, which includes the provision of public comment. 5

For example, we recently established a new rule requiring best execution of municipal transactions to help ensure that investors are getting a favorable price from their broker.

6 TRANSPARENCY Now let s turn to the MSRB s efforts to promote municipal market transparency. Six years ago the MSRB created a website that provides free public access to information about the municipal market trade. Since municipal bonds are not traded on an exchange, the MSRB s EMMA website provided for the first time a window for viewing all the trading activity in the market. The website also allows all market stakeholders -- from investors, to issuers to financial professionals to have free access to all of the offering and disclosure information for the more than 1 million outstanding municipal bonds Before the MSRB created EMMA as the official source for municipal market data and documents in 2009, this information was not readily available to all market participants. The data now available on EMMA ranges from real-time to trade prices and yields for individual securities to statistics on market-wide trends. EMMA provides access to credit ratings and variable rate securities information as well. EMMA also houses officials statements, continuing disclosures, advance refunding documents, 529 college savings plan disclosures and dealer political contributions. EDUCATION, OUTREACH AND MARKET LEADERSHIP Before I wrap up, I want to mention some of the ways the MSRB provides education, outreach and market leadership. The MSRB s website at MSRB.org provides a multimedia library of objective educational resources for investors, issuers and the broader market. 6

Since municipal bonds are not traded on an exchange, the MSRB s EMMA website provided for the first time a window for viewing all the trading activity in the market.

7 The MSRB has been engaged in a multi-year outreach initiative to meet with issuer groups across the country to help them understand how to Put EMMA to Work for them. Our goal is to raise awareness, particularly among smaller issuers, about the importance of disclosure and the guidance and tips available from the MSRB. The MSRB carefully monitors the market to identify issues that deserve a more thoughtful dialogue. For example, the MSRB has taken note of an increasing reliance on bank loans as an alternative to municipal securities. While we know hundreds of bank loans are outstanding, only a small number are disclosed to investors on EMMA. Investors and other market participants need the fullest picture of an issuer s liquidity or credit profile to make informed decisions. The MSRB recently renewed our calls for better disclosure of bank loans and other debt-like obligations in a January market advisory. The MSRB s advisory calls attention to the potential impact of undisclosed debt on bondholders and other market participants. The MSRB is reiterating our earlier encouragement that bank loans be disclosed on a voluntary basis on EMMA. The advisory provides suggested best practices for disclosure of bank loans and similar debt. The availability of timely information about an issuer s indebtedness on EMMA is critical for market transparency and promoting a fair and efficient market. CONCLUSION Thank you for your time and attention today. I am happy to take your questions. 7

The MSRB carefully monitors the market to identify issues that deserve a more thoughtful dialogue.

Education and Outreach Seminar. July 29, 2014 Chicago, IL

Education and Outreach Seminar July 29, 2014 Chicago, IL About the MSRB A self-regulatory organization created by Congress in 1975 Protects investors, municipal entities including issuers of municipal