WASHINGTON — The Municipal Securities Rulemaking Board wants broker-dealers to make sure that their issuer clients who use insurance understand that bond rating agencies are currently reviewing the insurers and have concluded they are not all on solid financial footing, MSRB chairman Frank Chin said Friday.
To that end, the board has instructed its staff to examine its rules and to see whether dealers should be reminded of any obligations that relate to fair dealing in this area, Chin said during a teleconference with reporters at the conclusion of last week’s MSRB meeting in Orlando.
“The monoline [insurers] are a big factor with what’s going on in our market today, and we just want to make sure that we review our rules and see how they potentially apply,” Chin said, adding that the board is just beginning to review the matter. “I wouldn’t go as far as to say that we’re going to tell [broker-dealers] that they’re going to have to do certain things, I think it’s much more reminding them that they have some over-arching responsibilities under the MSRB rules and in dealing with their clients.”
The move comes amid the ongoing turmoil in the insurance sector stemming from insurers’ exposure to the souring subprime mortgage market, which in turn has prompted insurers to scramble for additional capital. The turmoil threatens the triple-A ratings of bond insurers, such as MBIA Insurance Corp. and Ambac Assurance Corp., and has also led rating agencies to downgrade two bond insurers, Radian Asset Assurance and ACA Financial Guaranty Corp.
Chin, managing director and manager of public finance department at Citi, also announced Friday that the board has picked a name for the municipal Edgar system that it is developing and plans to launch in the second half of the year. Electronic Municipal Market Access, or EMMA, will replace the four nationally recognized repositories for secondary market filing documents, after the Securities and Exchange Commission adopts changes to its Rule 15c2-12 on disclosure, Chin said.
Chin said he is hopeful that the system can be launched by the end of the summer, but SEC officials recently suggested that the board will probably not get the regulatory green light until later in the year. It may take until the end of the current quarter to draft the rule changes, and an additional six months for commission approval of a final rule, meaning EMMA might not be operational until October, at the earliest.
EMMA will function as an add-on component to a primary market system called access-equals-delivery, which the board expects to launch in a pilot format sometime in the spring. Under access-equals-delivery, underwriters will be able to electronically post official statements and other bond offering documents on an MSRB-hosted “portal” in lieu of having to send investors paper copies of the documents.
Chin said Friday the board will mandate that broker-dealers participate in public testing for a third major project currently under development, the new issue information dissemination system, or NIIDS.
NIIDS, which is being developed by the Depository Trust Clearing Corp., in conjunction with the Securities Industry and Financial Markets Association and the board, will collect information about new muni bond issues from underwriters and disseminate it on a real-time basis to information vendors and other market participants.
DTCC has scheduled public testing of the new system for February and March, and plans to put the final touches on it by the end of April. Meanwhile, the board plans to make its use mandatory for all broker-dealers by June 30.
Firms will have to participate in the testing period to make sure they are fully capable of using the new system by the time it becomes obligatory, Chin said.
In addition, the board plans to amend either Rule G-14 on reports of sales or purchases or alter Rule G-34 on Cusip numbers and new-issue requirements to improve the transparency of auction-rate securities. Currently, the prices of such transactions are only reported at par, without their yields or reset rates. The board plans to soon require the reporting of reset rates, but is still examining which rule to amend to bring about that change, Chin said.
The board also is looking into possible changes to its Rules G-11 on new-issue syndicate practices and G-12 on uniform practices that would allow members of syndicates to conceal the identity of their customers, Chin said. Currently, the rules require a syndicate participant to reveal to the other syndicate members the identity of the institutional investors who purchase its portion of bonds in a transaction. The board plans to seek industry comment on whether it should consider changing such disclosure rules, according to MSRB executive director Lynnette Hotchkiss.
In another setback for the National Association of Independent Public Finance Advisors, Chin said the board has declined to make any changes to its Rule G-23, which currently allows a dealer financial-adviser in a negotiated bond transaction to switch roles and become an underwriter for the deal, as long as it discloses to the issuer both that conflicts of interest exist and the amount of its expected compensation. The firm must also obtain the issuer’s consent to the switch.
For the second time since 2005, NAIPFA had asked the board to amend the rule to require a dealer-FA contemplating such a role switch to: disclose to the issuer that conflicts of interest exist; obtain explicit formal consent from the issuer’s policy makers that the role switch and conflicts of interest are acceptable; and completely terminate its financial adviser role with the issuer once it becomes underwriter, unless the issuer contemporaneously employs more than one financial adviser.
“The board currently believes that the existing rule is appropriate,” Chin said.
NAIPFA president Kathy Aho said she was disappointed, but surprised, that the board had voted down her group’s request for a second time.
“I thought we pretty clearly stated in our materials to them what the inadequacies of the current G-23 language are,” she said.
