MSRB Eyes Jan. EMMA Start in Secondary

WASHINGTON - The Municipal Securities Rulemaking Board is proposing that the Securities and Exchange Commission allow it to begin operating the secondary market disclosure component of its EMMA system by Jan. 1, 2009, if the SEC is able to adopt proposed changes to its Rule 15c2-12 that would designate EMMA as a free, centralized repository for such disclosures by then.

The MSRB made the request in a filing submitted to the SEC last week in conjunction with a commission proposal to alter 15c2-12 to substitute EMMA for the four nationally recognized municipal securities information repositories, or NRMSIRs.

The commission voted unanimously Wednesday to publish both the 26-page MSRB filing and its 85-page 15c2-12 proposal for a 45-day public comment period that begins upon publication in the Federal Register. The SEC proposal requests that comments be sent by Sept. 22.

If the commission adopts the proposals, the NRMSIRs would cease to be NRMSIRs, but would continue to function as information vendors that receive their documents from EMMA instead of directly from issuers, under the SEC proposal. EMMA would eliminate the need for the Central Post Office disclosure facility that is currently operated by the Municipal Advisory Council of Texas, as well as CDINet, which the MSRB has operated since 1997 to collect material event notices from issuers but has asked to be shutdown for lack of use.

To prevent issuers from having to amend their existing continuing disclosure agreements for bond issues, the SEC has proposed that it withdraw all of its so-called "no-action letters" recognizing existing NRMSIRs.

The letters, which state the staff will not recommend enforcement action if broker-dealers use the facility to meet their disclosure obligations, would be withdrawn and the SEC would then designate the MSRB, through EMMA, as the only NRMSIR.

John McNally, a partner at Hawkins Delafield & Wood LLP here, said the move is the "cleanest" approach to ensuring that the proposal is implemented for new and existing agreements. He added that the proposed changes to 15c2-12 represent "another significant step" in the continuing evolution towards a free, Internet-based, muni-equivalent of the SEC's Edgar system.

McNally cautioned that he was speaking on his own behalf and said the National Association of Bond Lawyers, for which he is secretary, will be submitting formal comments to the SEC through its securities law and disclosure committee.

Both the SEC and the MSRB conceded in their filings that making EMMA the single NRMSIR for the muni market could have adverse effects on the existing NRMSIRs, particularly the ones that provide municipal disclosure documents as their primary business models.

Both filings cited correspondence from the head of one NRMSIR, Peter Schmitt, chief executive officer of DPC Data Inc., who argued against allowing the MSRB to host a central repository when the board first proposed that it start EMMA in a pilot format this year. The pilot format has been operating since late March and only features primary market disclosure documents and trade data pulled from the board's Municipal Securities Information Library and Real-Time Transaction Reporting System.

In a Jan. 23 letter to the SEC, Schmitt argued that if the SEC allows the MSRB to expand EMMA to become the sole secondary market disclosure filing venue, the commission would move "closer to the Tower Amendment danger zone."

The remark is a reference to the provision Congress added in 1975 to the Securities Exchange Act of 1934 which, among other things, prohibits the SEC and the MSRB from requiring any issuer of municipal securities, directly or indirectly, to file with the SEC or the MSRB, prior to the sale of the securities, any application, report, or document in connection with the issuance of the securities. The Tower Amendment also precludes the MSRB - but not the SEC - from requiring any issuer, directly or indirectly through broker-dealers, to provide the board or a purchaser any application, report, or document with respect to the issuer.

The board responded to DPC Data's concerns in its filing with the SEC by saying: "The MSRB believes that the proposed continuing disclosure service is consistent with the MSRB's mandate under the 1934 Act to adopt rules that, among other things, protect investors and the public interest by providing a free centralized source of information for retail investors."

A spokeswoman for DPC Data said yesterday that Schmitt is traveling outside the country and could not be reached for comment.

Issuers, who are likely the most sensitive market participants to concerns about regulatory overreach, seemed fully supportive of the MSRB and SEC proposals.

Alan Anders, deputy director of finance for the New York City Office of Management and Budget and a member of the Government Finance Officers Association's debt committee, said EMMA ultimately will mark a "big step forward" for the entire market in terms of providing real-time market access to both continuing disclosures and primary market bond documents. He said EMMA will be useful for institutional and retail investors alike.

Stressing that he is only speaking for himself and not for New York City or GFOA, Anders said that, in his mind, issuer support for the central repository is contingent on the SEC not using the current comment period to consider additional changes to municipal disclosure requirements. Last year, SEC chairman Christopher Cox urged Congress to consider making municipal disclosure more like corporate disclosure, a move that many issuers contend is unnecessary. In addition, Martha Mahan Haines, the SEC's chief muni official, has called for an overall review and updating of 15c2-12 after EMMA is established.

"This is a process of facilitating access to disclosure, rather than changing the types of disclosure, and that's an important distinction that needs to be maintained," Anders said.

In its filing, the SEC noted that while multiple NRMSIRs were once seen as beneficial in widening the retrieval and availability of information, experience has shown that their use has resulted in "significant inefficiencies" and investor complaints that dislcosure documents are incomplete or indexed improperly.

Also during the past 14 years, there have been significant advancements in the technology and information systems, including the use of the Internet, to provide information quickly and inexpensively to market participants and investors.

"In this regard, the commission preliminarily believes that the use of a single repository to receive, in an electronic format, and make available continuing disclosure documents, in an electronic format, would substantially and effectively increase the availability of municipal securities information about municipal issues and enhance the efficiency of the secondary trading market," the SEC said.

The commission estimated that the MSRB's start-up costs associated with developing the continuing disclosure component to EMMA would be about $1 million and that annual operating costs for the system would be about $350,000, excluding salary and other costs related to employees, which could total $400,000 per year.

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