A broker-dealer group is warning the Municipal Securities Rulemaking Board that its proposal for dealers to disclose more information about short-term securities would be onerous and is urging it to do a cost-benefit analysis before proceeding any further.
The warning revolves around changes the MSRB proposed Nov. 18 to its Rule G-34 that would require dealers to report information on auction-rate securities and variable-rate demand obligations to its short-term obligation rate transparency, or SHORT, system. The submissions would include ARS auction procedures, interest-rate setting mechanisms, and bidding information, as well as contact information for VRDO tender agents and the identifies of, and data from, VRDO liquidity providers.
But in a nine-page comment letter, the Securities Industry and Financial Markets Association told the MSRB that while it favors transparency, "this rule proposal as written is onerous" and said it "objects to this plan of making broker-dealers responsible for information in agreements to which they are not parties or to which they cannot gain ready access."
The letter, signed by managing director and associate general counsel Leslie Norwood, said, "SIFMA would like the MSRB and [Securities and Exchange Commission] to conduct a cost-benefit analysis to examine, not only this proposed rule change, but the cumulative impact of recent rule changes on the broker-dealers, specifically with regard to the potential increase in liability for broker-dealers and the potential effects on market efficiency."
Taking a somewhat different stance, the Regional Bond Dealers Association said in a three-page letter that it "generally supports the spirit of the MSRB's proposal," but is concerned that dealers are not always parties to the documents the board wants provided, such as letters of credit and standby bond purchase agreements for VRDOs.
"We believe market participants would benefit from better access to documentation related to outstanding ARS and VRDO transactions and to better data on the performance of ARS auctions and VRDO remarketings," the RBDA said in the letter, which was signed by co-chief executive officers Michael Decker and Mike Nicholas.
It noted that these sectors of the muni market were the "hardest hit" from the broader financial crisis," and said that "access to detailed information on the performance of auctions and remarketings" may have helped investors better gauge their exposure to weaknesses in the ARS and VRDO sectors" before the crisis and helped them avoid the problems that later emerged.
However, the RBDA agreed with SIFMA that, in some cases, ARS program dealers and VRDO remarketing agents may not have ready access to all the information or documents" the MSRB wants disclosed. The group said it "would support other reasonable initiatives to achieve the ends outlined in the release."
The letter is a turnaround from last year when the association said the MSRB's plan for making more ARS information available made no sense since the auction-rate market was dying.
Decker said yesterday that the RBDA changed its view after the MSRB decided to seek VRDO as well as ARS information and realized that "many ARS may be outstanding for a long time" because the penalty rates - interest rates paid by issuers when ARS auctions fail - are at or near zero and there is little or no incentive for issuers to convert or redeem them.
But SIFMA said that many of the ARS and VRDO documents being sought by the board "are already summarized in officials statements on file with EMMA," the Electronic Municipal Market Access system, and that "many broker-dealers already have auction procedures on their Web sites as well."
"SIFMA feels strongly that broker dealers should not be responsible for independently summarizing documents to which they are not a party, and submitting those disclosure summaries," it said. "This is not an appropriate allocation of responsibility and it would significantly increase the potential liability of the broker dealer" should the summaries contain errors or turn out to be misleading.
"An alternative suggestion, instead of the proposed rule, may be for EMMA to provide a statement for any municipal short-term issue that advises the following: 'To obtain copies of program documents, contact your investment professional,' " the group said.
SIFMA also objected to the time requirements for information and said the proposal is "particularly problematic for legacy transactions," many of which have paper documents that could not easily be scanned or uploaded to EMMA.
The proposal would require documents for outstanding ARS and VRDO issues to be submitted to within 30 days of the effective date of the rule changes. SIFMA said that "is not a reasonable timeframe" and that 180 days would be more appropriate if the board insists on pursuing the proposed rules.
The group said there are about 16,500 outstanding VRDO transactions serviced by 80 different broker-dealer remarketing agents. The top four dealers service over 1,100 issues with weekly resets, not counting those that have daily or other reset periods, it said. In addition, SIFMA said, there are 1,750 outstanding ARS transactions concentrated with about two dozen program broker-dealers.
The proposed rules would require new ARS and VRDO documents to be submitted within one business day of receipt. SIFMA said this timeframe would be "unduly burdensome" and that five days after receipt would be more appropriate.
SIFMA said that while there have not been any new ARS issues in over a year and a half, and none are expected, any bidding information should be disclosed "by way of a document, instead of breaking out each data element."
Meanwhile, the RBDA urged the MSRB to consider using optical character technology to convert image-based scans of documents into character-based scans that are fully text searchable. "This recommendation applies to all documents stored on EMMA, not just those document proposed to be submitted under the release," the group said.
