WASHINGTON - The Municipal Securities Rulemaking Board is initiating a study of the structure of the municipal market with an emphasis on pre-transaction price discovery, Securities and Exchange Commission member Elisse Walter announced Tuesday.
Walter, who briefly touched on the study in prepared remarks at the start of the SEC’s second hearing on munis, has repeatedly warned that there is often no way of knowing the precise price of a municipal bond, particularly in the secondary market if the bond has not recently been traded.
“I am delighted that the MSRB has decided to review these important issues as it seeks opportunities to improve the quality of the municipal securities market for the benefit of investors,” Walter said, noting that MSRB executive director Lynnette Hotchkiss would provide more details about the study when she testifies on a panel at an SEC hearing Tuesday afternoon.
Speaking at a bond attorneys’ conference in September, Walter said that great strides have been made in post-trade transparency because of the MSRB’s real-time reporting requirements and EMMA website. But because of the low liquidity levels of many bonds, trade data may be many weeks or months old.
She noted that while munis are currently traded in an over-the-counter, decentralized, dealer-intermediated market, that has not always been the case. In the 1920s, munis were actively traded on the New York Stock Exchange, a practice that ended in 1929.
Speaking on a panel on market structure at the SEC hearing, Thomas Doe, founder and chief executive officer of Municipal Market Advisors, said the SEC ought to consider whether issuers that are unable to provide timely and complete continuing disclosures should have access to the capital markets.
Doe warned that it is difficult if not impossible for retail investors to navigate the inconsistent disclosures.
“If you can’t provide information in a timely manner, maybe you should be denied access” from the capital markets, he said. “Maybe it’s not right for you.”
Doe said the MSRB and other regulators have the resources to better monitor all dealer activity to note irregular behavior that can potentially distort price evaluations and disrupt muni liquidity. Only a small number of market participants can influence price discovery as the universe of firms consistently active in both the primary and secondary markets that are providing liquidity has become more concentrated, he added.
Speaking on a separate panel on “investor impact,” several retirees said that they had hope the SEC would dictate a baseline of disclosure because it is difficult to easily find key information.
James Lebenthal, director of public affairs at Lebenthal & Co., said the time has come for Congress to repeal the so-called Tower Amendment, which restricts the SEC from collecting muni offering documents prior to bond sales.
“The time has come, we have national market and a national need for uniformity and issuers themselves should comply with a law of practicality and be required to meet basic standards for disclosure,” Lebenthal said.
