WASHINGTON — A muni market research group is urging Congress to require the Municipal Securities Rulemaking Board to tag issuers that fail to comply with their secondary-market disclosure agreements and then force dealers to take the flagged muni securities into account when trading.
The plan was floated by Matt Posner, a director at Municipal Market Advisors, in written testimony he provided to the Senate Finance Committee earlier this week. It would require the MSRB or an independent entity to monitor and flag munis on the board’s EMMA website when issuers fail to comply with their continuing disclosure obligations under federal securities laws. Broker-dealers would be required to show when they trade a flagged muni.
The idea, Posner said, is not to force disclosure, but rather to improve it by allowing the market to penalize noncompliant issuers.
“We have this problem,” he said. “So let’s let the market decide how they want to treat each issue.”
MMA’s proposal comes amidst heightened interest in and scrutiny of municipal disclosure among market participants, regulators and lawmakers on Capitol Hill.
The SEC has been conducting a muni market review since last year, with a report targeted for release later this year that may recommend legislative or regulatory changes. The SEC also is updating its 1994 interpretive guidance on the continuing disclosure obligations of municipal issuers.
In addition, the National Federation of Municipal Analysts and the Government Finance Officers Association are working on best-practice disclosure documents for general obligation debt and dedicated-tax bonds.
The House Ways and Means Committee’s oversight panel recently considered the Public Pension Transparency Act, a bill sponsored by Rep. Devin Nunes, R‑Calif., that would prevent state and local governments from issuing tax-exempt, tax-credit or direct-pay bonds if they failed to file annual reports with the Treasury Department disclosing certain information about their pension plans, including how they calculate their unfunded liabilities.
The MMA plan, the latest call to bolster municipal disclosure, would require an act of Congress to boost the MSRB’s compliance oversight, giving it authority to determine whether issuers are complying with their continuing disclosure requirements.
Under the Tower Amendment, the board and the SEC cannot require issuers to file pre-sale disclosure documents. The amendment, which was added in 1975 to the Securities Exchange Act of 1934, also bars the MSRB from requiring issuers to file post-sale documents. The commission regulates issuers indirectly, through its regulatory authority over broker-dealers. However, its anti-fraud rules apply to issuers.
Under the SEC’s Rule 15c2-12, dealers generally are prohibited from underwriting municipal securities unless an issuer has contractually agreed to disclose annual financial and operating information as well as material event notices with the MSRB.
According to Posner, the MMA proposal was designed to protect the autonomy of state and local governments.
“We’re not repealing Tower,” he said.
Specifically, the MMA proposal would give the MSRB authority to supplement EMMA with information tracking for every issue and issuer showing the number of days an issuer has been out of compliance with its continuing disclosure requirements on outstanding bond issues.
Broker-dealers who trade municipal securities would need to track the number and par volume of trades they made with municipals flagged for disclosure noncompliance.
MMA first proposed a version of this plan in March 2009, when its chief executive officer, Thomas Doe, testified before the Senate Banking Committee. At the time, Posner said, the concept failed to generate much notice.
The plan did not attract much attention this time around either, because Posner only testified about an MMA recommendation for improved disclosure and did not detail it for committee members.
Alerted of the plan on Thursday, market participants reacted with a blend of caution and skepticism.
“I don’t know how this particular proposal would be received, but it is creative and creative thinking should always be welcome,” said Robert Doty, president of American Governmental Financial Services Co. in Sacramento.
Meanwhile, a bond attorney questioned whether increased MSRB oversight is necessary, since underwriters, or their attorneys, should already be checking whether issuers’ annual filings satisfy the terms of their continuing disclosure agreements.
“I do not see a need for a third party, such as the MSRB or a proposed new authority, to act as the 'arbiter’ in determining compliance,” said NABL president John McNally, a partner at Hawkins, Delafield & Wood LLP in Washington.
A spokesman for the Bond Dealers of America also expressed reservations about the proposal.
“It’s not clear how requiring individual dealers to keep track of their trades in the 'flagged’ bonds provides investors with more information about the creditworthiness of potential investments, especially since industry-wide trading data is already available on EMMA,” said William Daly, the BDA’s senior vice president of government relations. “We are also concerned about unintended consequences that may push some issuers out of the bond market and into bank loans.”
But the Financial Industry Regulatory Authority may already be moving in this direction. It is currently developing a system that will tell its examiners and firms’ compliance officials whether firms that sold munis with material-event disclosures passed that information on to customers.
Spokespersons for GFOA and the MSRB and the did not respond to requests for comment about the MMA proposal.
Still, Posner hopes it will gain some traction.
“I think people are thinking more constructively about how to improve disclosure, under the guise of investor protection,” he said.
