For MSRB, From Many to One

WASHINGTON — This month is a significant milestone for the Municipal Securities Rulemaking Board, marking its one-year anniversary as the sole official repository for muni issuers’ continuing disclosure documents.

Beginning last July, the MSRB became the only nationally recognized municipal securities information repository, replacing the four NRMSIRs that existed at that time.

Since then, the board’s Electronic Municipal Market Access, or EMMA, online system has received 126,200 continuing disclosure documents from 7,800 registrants.

Of that total, about 85%, or 107,200, were mandatory disclosures. Around 41%, or 51,300, were for bond calls, while 32%, or 40,500, were annual audited financial statements.

Roughly 9%, or 11,100, were for rating changes and 5%, or 6,900, were quarterly financial statements, according to the MSRB. Just four filings were tied to “adverse tax opinions or event filings.”

Some of the EMMA system’s figures are well above those collected by the Central Post Office, a precursor to EMMA operated by the Municipal Advisory Council of Texas from 2004 until the end of last June when it ceased operations. However, the CPO — also known as Disclosure USA — was a voluntary system and its filings represent only a portion of the entire continuing disclosure universe.

For instance, a record 43 material event notices on principal and interest-payment delinquencies were collected by the CPO in the first six months of 2009 — up from 29 such filings for all of 2008. But those figures were dwarfed by 290 principal and interest-delinquency filings collected by EMMA during the past 12 months.

The spike likely reflects the current stresses on state and local governments, sources said.

In at least one specific category — notices of failure to provide annual financial information as required by borrowers’ continuing disclosure agreements — filings to EMMA were well below those of the CPO. For the calendar years 2005 through 2008, the CPO collected 419, 641, 689, and 797 such filings, respectively, and for the first six months of 2009, it collected 431.

In contrast, the MSRB has collected only 222 such filings for the past 12 months, and several of those were labeled as tests.

Market participants said it is difficult to draw any conclusions from the decline. While some speculated it could indicate heightened compliance since EMMA came online, several analysts who asked not to be named find that hard to believe. Non-compliance is a routine problem, they said.

MSRB executive director Lynnette Hotchkiss said it is impossible to draw conclusions about EMMA’s impact on compliance by comparing filing data.

“Our hope, of course, is that EMMA does provide issuers and their agents with a very easy, central place to file as opposed to a decentralized NRMSIR system,” she said. “That’s clearly the hope, clearly the expectation, but whether or not that’s true, I don’t have any [comprehensive] data to compare.”


That EMMA is now the only existing NRMSIR is a complete about-face from the years in which issuers and others tried to restrict its role in the disclosure arena for fear the MSRB would move beyond regulating broker-dealers and try to impose restrictions on issuers.

Though issuers for years have favored sending disclosures to a central repository rather than several of them, they were hostile to the MSRB developing and hosting one until fairly recently.

Their opposition was a large factor in the Securities and Exchange Commission’s decision to pursue a system of multiple, privately run repositories until last summer, years after the pitfalls of having multiple repositories had become readily apparent.

Relations between the MSRB and the Government Finance Officers Association were so frosty in the early part of the decade that GFOA members were instrumental in successfully excluding the board from discussions on the development of the CPO.

Designed to streamline the disclosure process for issuers and increase the accuracy of the labeling and storing of filings, the CPO collected issuers’ secondary-market disclosure documents and transmitted them to the four national repositories.

Fast forward to last Thursday, which marked the official anniversary of the MSRB, and the skepticism about the board among issuers has abated.

“The MSRB stepped into the breach and has done a marvelous job, a really commendable job,” said Frank Hoadley, Wisconsin’s capital finance director and the chairman of GFOA’s debt committee.

Other market participants are equally supportive. “It’s a fantastic tool for dealers as well as investors, and really anybody in the municipal securities market,” said Michael Nicholas, chief executive officer of the Regional Bond Dealers Association.

EMMA also has greatly enhanced transparency in the market during a time when investors are inundated with alarming headlines about distressed  state and local government finances, said Kristin Stephens, a director and municipal research analyst in the wealth management division of UBS Financial Services Inc. in New York. For many retail investors, EMMA may be the only free source of disclosure information, she said.

Mark Stockwell, chairman of the National Federation of Municipal Analysts and director of municipal research at PNC Capital Advisors in Philadelphia, said EMMA is “a great tool for making more timely disclosures readily available” to institutional and retail investors.

The NFMA is working with other market groups to develop templates to encourage more frequent disclosures of unaudited information from issuers, which EMMA already permits borrowers to post.

But not all market participants are crowing. Joseph Fichera, senior managing director and chief executive officer of Saber Partners in New York, said that despite EMMA shedding light on a historically opaque market, munis continue to lag behind other markets in terms of the amount of publicly available information that is easily accessible and comparable.

Fichera said EMMA is difficult to navigate without a Cusip number and that searches by issuer names seem “antiquated.” If a borrower’s name is slightly off, the system does not suggest alternatives the way a search on Google might, leading him to joke that the MSRB should contract with Google to enhance EMMA.

“I won’t criticize a candle versus darkness,” he said. “But more light can be brought to this market by using the technology that already exists and has been proven by the SEC’s EDGAR system or private vendors, like Google and a host of others.”

Meanwhile, because EMMA’s first anniversary comes as Congress is poised to give the MSRB significant new authority, including oversight of unregulated municipal advisers, some market participants are concerned at the prospect of a much more powerful board.

However, there is hardly the widespread consternation that likely would have accompanied such efforts had Congress made them 15 — or even five — years ago.

Hoadley said issuers see the current period as a “delicate” one in which the MSRB shifts “from the realm of a rule-writer into potentially the role of enforcer” — a reference to provisions in the financial regulatory reform legislation.

Specifically, the provisions would allow the board to assist other regulators in the enforcement of its rules, impose charges on dealers or FAs for the late submission of data or other information required by its rules, as well as collect a portion of the fines charged by the SEC and Financial Industry Regulatory Authority for violations of MSRB rules.

At the same time, though, the board would cease to be controlled by dealers. Though it would be able to expand beyond its current 15 members, “public” members would always have to comprise a majority beginning Oct. 1, the start of the MSRB’s new fiscal year.


Legislation to revamp the financial regulatory system was adopted on Wednesday in the House by a vote of 237 to 192. The full Senate may vote on the matter next week, when lawmakers return from a week-long recess following the July 4 holiday. It is unclear if Senate Democrats will be able to get the 60 votes they need to block an expected Republican filibuster of the legislation.

MSRB regulation of financial advisers creates a new and potentially worrying dynamic because FAs are professionals that sit in the issuer’s corner, Hoadley said, “and so we have that regulatory reach coming closer and closer to the issuer.”

Issuers also are concerned about a program being pushed by the SEC that would allow the board to indicate on EMMA whether issuers have voluntarily agreed to include in their continuing disclosure agreements any of four enhanced-disclosure commitments, including filing annual financial information within 120 days of the end of their fiscal years.

Florida director of bond finance Ben Watkins has warned that such a turnaround period is unrealistic and worries that it marks an SEC attempt to regulate issuers in “a back-door way” that circumvents the so-called Tower Amendment. The amendment was added in 1975 to the Securities and Exchange Act of 1934 to restrict the SEC and MSRB from collecting documents from issuers prior to bond sales.

In response to issuer complaints, the board altered the proposal to temporarily give states and localities more time to voluntarily disclose annual financial information — up to 150 days — but issuers insist the vast majority of governmental entities need 180 days.

At the same time, issuers also are apprehensive about the role Internal Revenue Service officials want EMMA to play in connection with the Build America Bonds program.

The IRS, which has already begun auditing some BAB issues, has suggested issuers of negotiated BAB transactions check the bonds’ trading and pricing data on EMMA to determine whether their underwriters were accurate in certifying that all of the bonds were publicly offered at the initial offering price.

Underwriters typically make such certifications to the issuers. But issuers have complained that IRS scrutiny of BAB deals is burdening them with brand-new ground rules and requirements that could reduce or halt the subsidies they receive from the government on the bonds.

Despite these concerns, Hoadley said it was inevitable that issuers would embrace EMMA, partly because of a 2007 patent lawsuit filed against the Texas MAC by Digital Assurance Certification LLC, which led to a settlement that summer that significantly curtailed the CPO’s features, including “tickler” e-mails alerting issuers of upcoming filing deadlines for their disclosures.

“At the end of the day, the Disclosure USA project was a roaring success but got tripped up by the patent issues and the subsequent liability issues that the suit raised for the Texas MAC,” Hoadley said.

Paula Stuart, chief executive officer of DAC, did not respond to a phone call seeking comment.

While some market participants have speculated that the earlier friction with the MSRB stemmed from a difficult working relationship with Christopher “Kit” Taylor, who left the MSRB in 2007 after 30 years as its executive director, Hoadley downplayed that suggestion.

“There was distrust against any Washington regulator that could begin to exert control over the issuer side of the market,” he said. “Resistance would have been encountered by anyone trying to, or thought to be trying to, exercise that control.”

In addition, he noted that issuers did not have the financial resources and technical knowledge to develop, launch and maintain a site like EMMA.

Julia Cooper, deputy finance director of San Jose and vice chair of the GFOA debt committee, also downplayed the personality conflicts.

She said there were several reasons for issuers to embrace EMMA, including the development of the so-called access-equals-delivery system that allows dealers to distribute electronic copies of official statements in lieu of having to mail paper copies to investors.

Access-equals-delivery “made more people comfortable with documents moving in an electronic way,” Cooper said, adding that it costs nothing for issuers to file or access documents on EMMA, which wasn’t the case with the CPO.

Cooper also said EMMA’s popularity is driven in part because it’s free and negates the need for dissemination agents because issuers are able to control when a document is posted and to verify that it is posted correctly.


One specific concern about EMMA, however, is that it lacks a historical archive. The system does not contain any material event notices or annual financial filings made prior to it becoming the sole NRMSIR. Some analysts believe the lack of an archive presents hurdles to reviewing a credit.

“I’m looking at a deal that’s in default. When did the default start? Who knows? History begins on July 1, 2009, from EMMA’s perspective,” said Matt Fabian, managing director at Municipal Market Advisors.

The lack of an archive also has been an issue for dealers as well, forcing them to continue to rely on the former NRMSIRs to check issuers’ disclosures five years back before underwriting new deals. Under the SEC’s Rule 15c2-12, dealers must have a reasonable basis for believing the issuer will follow through on its continuing disclosure obligations.

“EMMA is a great new system and because of the underwriter’s obligation to check five years of history, it will only reach its full potential in the next five years,” said Leslie Norwood, managing director and associate general counsel at the Securities Industry and Financial Markets Association. “We expect EMMA to continue to develop and improve and the usefulness of the system will only increase to market participants.”

Stephens, the UBS muni analyst, said that EMMA is quickly maturing. While the volume of disclosure materials was limited at first and her preference was to search for documents on Bloomberg, one of the former NRMSIRs, she now looks at EMMA for most documents.

Hotchkiss said the board was unable to obtain a complete historical library from the former NRMSIRs because their disclosure collections each were quite different, with individual documents categorized in different ways. As a result, there was no central index of all the filings.

“I think that people thought we were going to buy an electronic tape and just easily file it into the EMMA system, but that couldn’t be farther from the truth,” Hotchkiss said. “Our system is Cusip-based, and they all had different systems, so it would have required manual intervention for each and every document to get them on EMMA.”

“We wanted to put our resources into building the system moving forward,” she added.

Hotchkiss noted that the board is currently working with rating agencies and the SEC to post ratings directly on the site, and is also working on the second phase of its transparency system for auction-rate securities and variable-rate demand obligations.

Though at least one rating agency, Standard & Poor’s, has indicated publicly that it does not believe the MSRB’s ratings proposal will adequately protect its intellectual property, Hotchkiss said the board is moving forward. Market participants have said that Moody’s Investors Service and Fitch Ratings are supportive.

Asked about the negotiations with the rating agencies, Hotchkiss would only say that “whoever wants to participate is welcome to.”

The new features come on top of the continuing and primary market disclosure documents the board already collects and posts, as well as close to  real-time trade information.

Auction-Rates and VRDOs

As early as this week, MSRB officials said they plan to revise rule changes with the SEC to implement the final phase of their transparency system for auction-rate securities and variable-rate demand obligations.

The revisions would require dealers to submit bidding information for ARS as a set of individual data points, a change from a March proposal that would have required dealers to submit bidding information in document form after each auction.

This could help with a concern that had been raised by Fichera. He argued that EMMA should minimize the amount of steps it takes to find and compare information, warning that the MSRB should abandon using PDF documents to convey market statistics about auction-rate securities, for the simple reason that information in PDFs cannot be easily compared.

In its earlier proposal that would have allowed dealers to submit documents, the board was bowing to dealer complaints that it would be too costly and time-consuming to extract bidding information and submit it in individual data fields, as proposed in draft rule changes floated last year.

That argument — along with the fact that about 80% of the auctions are consistently failing and would have little or no meaningful bidding information— had swayed the MSRB.

But Fichera argued that the document approach, to accommodate dealers’ concerns about programming and reporting costs, seemed “to ignore the fact that all authorized broker-dealers in auction securities have electronic systems already in place to handle submission of bids to the auction agents in auction securities.”

“While there may be integration issues, they are not likely to be substantial,” he wrote in a comment letter to the SEC. “The point is that dealers and agents already maintain and use the information electronically.”

The amended proposal will be subject to another round of comments before SEC staff, which review all MSRB proposals, decide whether to sign off on it.

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