WASHINGTON - The National Federation of Municipal Analysts is calling for municipal disclosure practices to be made more like corporate disclosures and is urging lawmakers to provide a federal regulator with the authority to directly oversee muni disclosures and market participants.
In a five-page letter sent to the ranking members of the House Financial Services and Senate Banking Committees as well as Securities and Exchange Commission chairman Mary Schapiro, the NFMA also said that if the Municipal Securities Rulemaking Board is to continue regulating the market, the composition of its 15-member board must change so that "all stakeholders, including NFMA ... have board-level representation to promote market fairness."
In addition, the analyst group called for the establishment of a municipal market advisory panel, possibly modeled on the Muni Council, that would consist of the major muni trade organizations and "help develop and maintain the quality of a regulator and regulatory scheme."
The Muni Council is an organization of about 20 municipal groups that worked to improve disclosure practices earlier this decade. It was responsible for the establishment of the Central Post Office secondary market disclosure site that is essentially being replaced next month by the MSRB's EMMA system.
The NFMA said it wrote the letter out of concern that the "depth and diversity" of the municipal market will not be fully considered as Congress and federal regulators consider new oversight and regulatory changes.
In a reference to legislation pending in the House Financial Services Committee, the letter notes that congressional discussions are mostly focused on "general governments and their general obligation, unlimited-tax securities."
"However, governments and government authorities sell many other types of securities, including bonds payable from hospital revenues, student tuition and fees, toll road revenues, sales taxes, general appropriations and residential mortgages," the NFMA wrote.
In a conference call with reporters yesterday afternoon, NFMA chairman Bill Hogan, who is senior managing director of public finance at Assured Guaranty Corp., warned against a one-size-fits all approach to municipal disclosure. "Different sectors require a different level of disclosure," he said.
The letter is dated Thursday but was not released until yesterday. It is signed by NFMA executive director Lisa Good and co-authored by Peter Bianchini, managing director and senior municipal strategist at Mesirow Financial and a past NFMA chair, and Natalie Cohen, chief executive officer of National Municipal Research Inc.
Though the letter does not take a position as to which entity would be best suited to improve municipal disclosures, the NFMA believes that the regulator for the muni market "must be organized and governed so that it considers the needs of the public and all market participants."
The group recommended that the regulator have "direct rulemaking authority over the disclosure of key credit features of securities themselves, as well as the borrowers, and ancillary deal participants such as swap counterparties, insurers and other credit enhancers."
The NFMA also said that it would support Congress legislatively removing "barriers to change" that would allow capital markets regulators to "work directly with all market participants to implement and enforce robust and timely disclosure."
Since the financial crisis began about two years ago, NFMA members and other market participants have "struggled to unravel the details" of a number of different transactions, the letter said.
"For interest rate swaps and similar instruments, simply being able to track exposure to troubled counterparties is a time-consuming, frustrating and often fruitless effort," it said. "The structure of a swap, the counterparties involved, and in particular a transaction's terms and triggers are often not disclosed to investors. For example, it was not readily clear which borrowers had interest rate caps on auction-rate bonds."
The NFMA warned that it also has been difficult to determine rating-downgrade triggers for replacement of counterparties and that the consequences for noncompliance "were not obvious."
Meanwhile, borrowers who had purchased guaranteed investment contracts, from failed institutions, the collateral triggers, replacement of counterparties, or cash funding requirements were not always known, nor were the terms of liquidity facilities tied to variable-rate bonds, the analyst group wrote.
"Similarly, how much money a municipality gets up front in a 'swaption' is not typically revealed, nor is the size of the termination payment to unwind a swap," the letter stated.