Another NRMSIR Warns Against EMMA System

WASHINGTON - A second nationally recognized municipal securities information repository has warned about the anticompetitive effects of the SEC's proposal to amend its Rule 15c2-12 to designate the MSRB's Electronic Municipal Market Access system as the muni market's central repository for continuing disclosures.

At the same time, Connecticut Treasurer Denise Nappier has suggested that the Securities and Exchange Commission may be a more appropriate venue for EMMA than the Municipal Securities Rulemaking Board, which is a self-regulatory organization for broker-dealers.

The NRMSIR, Standard & Poor's Securities Evaluation Inc., a subsidiary of the McGraw-Hill Cos., and Nappier made their remarks in comments on EMMA that were submitted to the SEC this week.

In its 16-page comment letter, Standard & Poor's said: "Replacing the current system of private vendors with the MSRB as the single, exclusive official repository and disseminator of municipal securities disclosure raises concerns about the potential adverse effects of eliminating competition from the existing system."

The letter was signed by Louis Eccleston, president of the repository, which is one of the four NRMSIRs.

Standard & Poor's joins the Fort Lee, N.J.-based DPC Data Inc., another NRMSIR, in asking the SEC not to abandon the current continuing disclosure system.

"We propose that the commission seek to improve the current system through the alternative means of a 'central post office' approach, which would address those aspects of the system that can be remedied but would not raise the anticompetitive concerns or legislative authority issues," the rating agency wrote, an apparent reference to the Central Post Office facility operated by the Texas Municipal Advisory Council, which collects issuer documents and disseminates them to all four NRMSIRs.

The argument may not gain much traction, however, in light of the fact that the Texas MAC, in its comment letter, expressed support for EMMA as an improvement on "the current decentralized system."

The Standard & Poor's comment letter comes after SEC officials have said that EMMA's impact on the NRMSIRs would be limited because they would continue to function as information vendors with "value-added services." Market participants have long argued that the NRMSIR system is flawed because of inconsistencies in the way the repositories collect and display disclosure documents.

Still, Standard & Poor's letter mirrors the general sentiment of a separate comment letter sent to the SEC last week by DPC Data, which charged that establishing EMMA was a "railroad job aimed at taking the public's attention away from the true disclosure problems" and that the system would place the MSRB in direct competition with commercial vendors and violate the 1975 Tower Amendment.

The Tower Amendment, added in 1975 as an amendment to the Securities Exchange Act of 1934, bars the SEC and MSRB from requiring municipal issuers to directly or indirectly file documents with them before issuing municipal securities.

Though Standard & Poor's stopped short of arguing that the SEC's proposal violates the amendment, it noted that the commission does not discuss the matter in its EMMA proposal, unlike two previous adopting releases for 15c2-12. The NRMSIR urged the SEC to "analyze this issue further and publish its conclusions for comment before adopting" the current proposal.

Nappier praised the MSRB for its leadership in creating EMMA, but said in her two-page comment letter: "I wonder if such an ambitious and market-encompassing project should be placed under the auspices of an entity that represents only one segment (broker-dealers) of the municipal market, when it seems that responsibility for such a task would more appropriately lie with the SEC. The SEC has the primary responsibility of protecting investors, and its management of Edgar for corporate issuers has been highly successful."

Acknowledging the efficiency of the existing EMMA platform, Nappier said it is critical that the SEC maintain close oversight over the system's expansion "to ensure that the needs of all market participants are being addressed."

The treasurer suggested that the SEC should plan to revisit the system in two or three years to determine if the MSRB is meeting expectations or whether the commission should consider managing the EMMA system itself in the same manner as the Edgar system.

Most of the comments sent to the SEC express strong support for the proposal, particularly those from the National Federation of Municipal Analysts, the Investment Company Institute, and the Securities Industry and Financial Markets Association, which all favor the transition to an entirely electronic means of transmission of continuing disclosures.

One comment letter, from Cate Long of Multiple-Markets.com, pointedly noted that "the use of paper documents in any part of the financial markets is an outmoded way of conducting business."

State and local groups such as the National Association of State Auditors, Comptrollers, and Treasurers said that smaller issuers may need additional time to accommodate an electronic-only process and asked for "a significant time lapse" before electronic-only submissions are required. The MSRB appears to have agreed to such requests by delaying until September 2009 the requirement that issuers file word-searchable, electronic-only continuing disclosure documents. Tables or charts in the documents are exempt from the word-searchable requirement.

The Government Finance Officers Association goes a step beyond NASACT and asks the SEC for a three- to six-month grace period before making any electronic filings to EMMA mandatory and at least nine months to a full year before requiring word-searchable documents.

"This will allow time to educate issuers on their new responsibilities and ensure compliance with the electronic format," GFOA said, according to a draft letter the group planned to file yesterday.

The letter says that if an issuer continues to have trouble filing electronically, it can turn to one of the many outside professionals on their finance team to assist them.

While some issuers, especially smaller ones, may have to purchase new software in order to submit electronic documents, the long-term savings that an electronic-based central repository would provide will benefit state and local governments and authorities, the GFOA said.

The letter also said that the group supports the use of a cover sheet that contains identification information for each filing, such as the name of the issuing entity and Cusip number. It stressed that it is "imperative" for the public to be able to search for bonds on EMMA not only by the Cusip but also the name of the issuer or borrower. MSRB officials have conceded it is difficult to find individual bonds on EMMA's pilot system without the Cusip.

Meanwhile, Rob Yolland, chairman of the NFMA, wrote that EMMA should "attain the capability to house all disclosure documents, extending beyond those specifically required" by 15c2-12, which requires issuers to disclose annual financial and operating information, as well as 11 specific material events.

"These other items include legal documents such as trust indentures, utilization or operating data compiled by an issuer in keeping with NFMA's recommended best practices papers, and other disclosure information that may be provided by an issuer," Yolland wrote.

Similarly, ICI general counsel Karrie McMillan called on the SEC to expand the types of primary and secondary market information that issuers must disclose.

For primary offerings, she said, additional information should include indentures, loan agreements, master trust indentures, security documents, legal opinions, tax certificates, and certain escrow agreements.

For secondary offerings, McMillan said, additional information should include "material events that more fully reflect the types of events that are material to today's investors," such as pending or threatened material litigation, material acquisitions or dispositions, material casualty events, changes in senior management, change in control, change in accountants, loss of licensure for operation of a facility, and bankruptcy or receivership filings.

McMillan said the steps could be taken now, without legislative action that would repeal or amend Tower.

Issuers groups like GFOA and NASACT, however, are opposed to any such changes.

Meanwhile, the National Association of Bond Lawyers said that the SEC could take two steps to capture most issuers' continuing disclosure filings made in connection with any existing disclosure undertakings.

First, the SEC could amend 15c2-12 to require that, going forward, when an issuer with outstanding debt taps the market again, it will agree to file with the MSRB any new disclosure undertakings as well as "all undertakings previously entered into."

In addition, the commission also could issue an interpretive letter stating that an issuer that chooses to satisfy an existing undertaking by transmitting filings to the MSRB is acting in a manner consistent with the intent of Rule 15c2-12.

The SEC issued a similar interpretive letter on Sept. 7, 2004, as part of the Texas MAC's establishment of the CPO.

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