WASHINGTON - The Municipal Securities Rulemaking Board on Friday proposed a partial delay in the rollout of a new transparency system for short-term securities, in response to industry requests for more time to test and implement the system.
The board said it would leave unchanged the proposed Jan. 30 start date for requiring broker-dealers to begin reporting auction-rate securities information to the system, dubbed SHORT, for Short-term Obligation Rate Transparency. But the MSRB said it would like to delay until April 1 the deadline for providing data on variable-rate demand obligations.
The board made the changes in amendments to a November proposal filed with the Securities and Exchange Commission, which must still approve the proposal. SHORT comes after the $330 billion auction-rate market collapsed last February when dealers withdrew support for auctions, shunning ARS because they were backed by insurance from downgraded bond insurers and lacked the put option featured on VRDOs.
Estimates vary, but sources have said that there are some $70 billion of outstanding municipal ARS and more than $400 billion of municipal VRDOs. Once the system is launched, information submitted to SHORT will be displayed on EMMA, or Electronic Municipal Market Access, which the board is developing and operating.
Friday's amendments come after the Securities Industry and Financial Markets Association, the Regional Bond Dealers Association, and Wells Fargo Brokerage Services LLC argued in comments to the SEC that the Jan. 30 implementation date was unreasonable. Their claims stemmed from several concerns, including that the board had provided specifications for SHORT just last month when virtually all broker-dealers had begun or were about to start year-end "system freezes," when no operational system changes could be made.
But because the number of municipal ARS issues are relatively small, especially compared to VRDOs, the board said that it believes that dealers will be able to manually report information about ARS using SHORT's Web component if they do not have enough time to automate such tasks by month's end.
"In addition, since ARS are primarily a retail product, the MSRB believes it is important to provide transparency of ARS as early as practicable," the board said in its amended proposal.
"We are pleased to be nearing the day when investors can access interest rate information about auction-rate securities," MSRB executive director Lynnette Hotchkiss said in a statement. "This will add a new level of disclosure to the municipal market, and be particularly helpful for the retail market."
The board said that manual submission of VRDO information would be "impractical" because of the high number of such securities and the frequency with which their interest rates reset, typically on a weekly basis.
"The large number and frequent rate resets of variable-rate securities require dealers to use automated rather than manual reporting systems, which take time to put in place when done correctly," Hotchkiss said. "MSRB expects full compliance with the variable-rate program and the additional months' time will help make this program a success."
John Nester, a spokesman for the SEC, declined to comment on the specific proposal, but said: "We generally welcome efforts to increase transparency in the municipal securities market."
The move was met with the support of at least one of the commentators that urged a delay, Jeffrey Schuh, vice president and chief compliance officer of Wells Fargo Brokerage Services. He said the VRDO delay would give his firm enough time to comply with the new requirements. Wells Fargo is the remarketing agent for more than 500 VRDOs and no longer supports any ARS programs, he said.
Jacob Zamansky, a securities lawyer who represents individual investors, said the transparency system is a welcome but "long overdue" addition. He criticized the SEC for not prodding the MSRB to increase transparency earlier, noting that the commission was aware of systemic problems in the ARS market in May 2006, when it reached a $13 million settlement with 15 broker-dealer firms over disclosure failures in the market.
"Had they monitored the situation or come up with transparency rules, a lot of the crisis could have been avoided," Zamansky said. "This is another example of the SEC looking at a rule long after the harm has been done."
Espen Robak, president of Pluris Valuation Advisors, which assesses the market value of illiquid ARS, said that criticism of the SEC on short-term transparency might be fair, but noted that demand for a system like SHORT was limited until last year because few people expected broker-dealers would ever withdraw their support for the securities, as they did en masse in February.
Robak predicted that the SHORT would eventually help municipalities by lowering the "illiquidity premium" they are currently paying on their outstanding ARS.
The board has said it plans to launch SHORT in three phases, beginning with basic reset information for ARS and VRDOs. When complete, the system will provide information on prices, bidding, and program documents for ARS and VRDOs.
Historically, trades of such securities have been reported at par and do not include their clearing rates. There is no publicly available source of comprehensive same-day information about either type of security.