MSRB: Speeding Up SHORT?

WASHINGTON - The Municipal Securities Rulemaking Board later this week is expected to explore the possibility of consolidating the final two phases of its transparency system for short-term debt as well as providing more information about issuers' underlying credit ratings to investors.

Also at its three-day meeting in New York City, the board will discuss an extensive long-term planning project that includes a survey of about 75 former members and other market participants to solicit their views on the issues and priorities facing the board going forward.

"We want to hear from issuers, investors, financial advisers, and bond lawyers ... on shaping the role of the MSRB and what our priorities should be," MSRB executive director Lynnette Hotchkiss said in an interview yesterday, adding that the board would like to complete the long-term planning process by the end of the calendar year.

A copy of a six-page survey sent to one market participant that was obtained by The Bond Buyer asks for input on a range of topics including “key scope and priority issues,” as well as issues tied to “regulatory, advocacy, and political environment.” Responses to the survey were due on Friday to Association Management and Marketing Resources, a consultancy hired by the MSRB.

Former MSRB executive director Christopher "Kit" Taylor questioned the need for a self-regulator to survey market participants. Historically, the MSRB expected its 15 board members to solicit advice from their own contacts within the industry, he said.

But a market participant familiar with the board's thinking said that there is nothing wrong with the board surveying a broad section of the market, and that it is similar to the board's soliciting public comments on its proposed rules.

Separately, Hotchkiss said that as part of an effort to expedite the development of its Short-term Obligation Rate Transparency, or SHORT, system for auction-rate securities and variable-rate demand obligations, the board is considering "collapsing" phase two on ARS bidding information and phase three on ARS and VRDO program documents into one final phase of the system. But the board's decision will depend on overcoming some legal hurdles as well as how quickly the industry can act, Hotchkiss said.

At least one hurdle revolves around the collection and dissemination of program documents for VRDOs, which typically are backed by a letter of credit or a standby bond purchase agreement. Because LOC agreements are between an issuer and an LOC bank, the MSRB may have some legal difficulty requiring dealers to post them because dealers are not typically a party to them, Hotchkiss said.

The initial phase of SHORT was launched in January 31, when dealers were required to provide basic ARS data, such as the interest rate at which the bonds reset. The reporting of basic VRDO information, also part of that first phase, is set to begin tomorrow.

Meanwhile, Hotchkiss said that the board will also discuss ways to improve investor access to an issuers' underlying credit rating, which has become more important in the wake of widespread downgrades in the ratings of most bond insurers.

In January, the board instructed its staff to begin studying how to overcome "existing barriers" to making underlying ratings accessible to investors in a timely and equitable manner, possibly through the board's EMMA system.

It may not be necessary for the board to consider any rulemaking because it could partner with the three major agencies that rate municipal paper to upload rating information to EMMA, according to one market participant familiar with the issue.

But that type of agreement may be hard to reach because rating agencies have resisted, as a violation of their intellectual property rights, attempts by the Securities and Exchange Commission to make a large number of their ratings available for free. In fact, Standard & Poor's rejected a similar idea late last week while commenting on reproposed SEC rules tied to nationally recognized statistical rating organizations, or NRSROs.

In its letter to the commission, Standard & Poor's said that any requirement to make historical ratings data available for free and without use restrictions would "unnecessarily interfere with an NRSRO's ability to capitalize on and protect its intellectual property," though it noted that its individual public rating actions "are always made available on our Web site for free and in real-time."

The SEC wants NRSROS to make available in XBRL-format a random sample of 10% of their outstanding credit ratings for which issuers have paid, after a six-month lag. A related proposed rule change would require NRSROs to display all of their issuer-paid ratings issued on or after June 26, 2007, after a 12-month lag.

Currently, no disclosure of credit ratings is required for new muni issuances, though the SEC's continuing disclosure rules require issuers to file material event notices in the event of "rating changes."

Hotchkiss said the board also is likely to again discuss the possibility of changing its Rule G-37 on political contributions to include contributions to bond ballot campaign committees that authorize issuance of muni bonds.

The board is concerned about the practice but decided at its January meeting to direct its staff to first undertake a review of contributions and business practices in this area to gain a better understanding of them and their potential impact on the market.

Public finance executives at the three largest underwriters for negotiated transactions - Citi, JPMorgan, and Morgan Stanley - wrote a letter to the MSRB in December arguing that the rule's restrictions on contributions to such ballot campaigns should mirror the restrictions on broker-dealer contributions to issuer officials.

Under G-37, dealers cannot engage in negotiated municipal securities business with an issuer for two years if they or their municipal financial professionals - known as MFPs - contribute to issuer officials who can influence the award of muni bond business. MFPs, however, can contribute up to $250 to any issuer official for whom they can vote.

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