Issuer Community Losing Cohesion

WASHINGTON — Congressional interest in municipal securities has increased significantly at a time when the issuer community does not appear to be as cohesive as it has been in the past, the Municipal Securities Rulemaking Board’s executive director said this week.

“There’s a lot of interest [in Congress] and I don’t see that waning anytime soon,” Lynnette Hotchkiss said at the Council of Infrastructure Financing Authorities federal policy conference here on Monday.

“Traditionally municipal market issues have been the purview of the Senate Banking Committee, the House Financial Services Committee and the House Ways and Means Committee,” she said. “Now that group has expanded significantly” to ­include the agriculture committees and the aging and pension panels of other ­committees in the House and Senate as lawmakers consider derivatives and pension issues.

Making another observation, Hotchkiss said: “In my 26 years working in the municipal finance market the issuer community has really been a very solid, unified force. But what I’m observing, and this is my opinion, is that when you look at some of the legislative proposals, specifically doing away with tax-exemption, the issuer community seems to be fragmented a bit and perhaps the traditional state and local GO issuers are willing to throw the conduit borrowers or others under the bus a little bit.”

“It’s a little too early to know if that’s going to play out, but it doesn’t appear that the issuer community is as cohesive and cogent as it was in the past,” Hotchkiss told the group.

Asked about the issue at the Government Officers Finance Association meeting in San Antonio Tuesday, Frank Hoadley, Wisconsin’s capital finance director, said the split between GO and private-activity bond issuers has taken years to develop. 

At some point policy-makers may have to make “a difficult choice between conduit financing continuing as tax-exempt at the risk of being able to retain tax-exempt funding for governmental-purpose bonds,” Hoadley said.

Hotchkiss also explained to those attending the CIFA meeting about the MSRB’s mission to protect municipal issuers and entities.

“We have no regulatory authority over municipal issuers nor do we want to have regulatory authority over issuers. But we believe that by establishing rules that ­regulate advisers and dealers, that we have a robust rulebook, that obviously inures to the benefit of the municipal issuer,” she said, outlining the MSRB’s recent ­regulatory activities.

Hotchkiss noted that the board’s EMMA website, with its trade data and disclosure documents, is there to help issuers.

“We want to make sure that the issuer community has access to all of the information that comes into the MSRB, all of the trade data, all of the market disclosures, so that the issuers really feel like they have enough information to make decisions about their financing goals, or question their financial advisers about pricing, or compare their variable-rate programs against other similarly rated programs,” she said.

Last week, the board began requiring dealers involved in variable-rate demand obligations and auction-rate securities to post additional data and liquidity documents. On Monday the MSRB launched an initiative to allow issuers to post pre-sale and other documents on EMMA.

“It really empowers the issuers to take control over their part of EMMA and post whatever information [they] would like to make available to the market,” Hotchkiss said.

She also outlined a list of issues that keep her up at night. One was market structure and the importance of providing pre-trade and other information to retail investors so they can make good decisions when they trade munis.

Another was multi-state and multi-jurisdiction issuers. “I think that there have been multi-jurisdiction issuers for a long, long time and many of them work fine,” she said. “But if you’re really just set up to make money it does cause some issues and problems and I worry about that a little bit.”

Hotchkiss said that while she wants to make sure that regulation is appropriate, she does not want it to be so burdensome that market participants move to the private loan or bank lending markets that have little transparency and leave issuers with much less access to the capital markets.

She also said she worries about “headline risk” and said the press is responsible for alarming headlines in the media about the muni market that have caused some retail investors to pull out of the sector.

Cliff Gannett, acting Internal Revenue Service director of government entities, which includes the tax-exempt bond office, also spoke to the group.

“Even our name is out of date,” he said half-heartedly. “It almost should be [the office of] tax-advantaged bonds,” he added, with all of the congressional and market interest in tax-credit and direct-pay taxable bonds.

Dave Sanchez, an attorney fellow in the Securities and Exchange Commission’s municipal securities office, told the group that the SEC, which is conducting a review of the muni market, may hold one other hearing, perhaps over two days, despite budget cuts.

An SEC spokesman confirmed ­Tuesday that a hearing will be held in Birmingham, Ala., which is in the district of House Financial Services Committee chairman Spencer Bachus, R-Ala. A date for the hearing has not yet been set.

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