WASHINGTON – Retail investors in the municipal bond market would benefit from improved disclosure practices, price fairness and transparency, the Municipal Securities Rulemaking Board told the Securities and Exchange Commission's Investor Advocate in a recent letter.
The board also said it worries about how rising interest rates will impact the market and how to protect senior investors.
MSRB chair Lynnette Kelly made these points in a four-page letter to the SEC's Rick Fleming.
The Investor Advocate had asked the MSRB to identify products and practices within the municipal securities market that may have an adverse impact on retail investors.
Kelly said the board continues to press issuers to voluntarily disclose information about their bank loans and alternative financings so that investors have a more complete picture of their finances. The board recently made changes to its EMMA system to make it easier for issuers to make such disclosures.
MSRB also wants issuers to disclose information to investors in a shorter timeframe. The board recently determined that it takes issuers, on average, 201 days after the close of their fiscal years to disclose audited financial statements of comprehensive annual financial reports (CAFRS), Kelly said. Issuers should try to be more timely in communicating to investors, such as by disclosing intermediate or unaudited financials, the board said.
The MSRB is also concerned about selective disclosures where issuers may provide certain investors information not made available to everyone. Issuers should implement disclosure practices to ensure this doesn't happen, Kelly said told Fleming.
Recent municipal bankruptcies and restructurings have made clear that it is important for issuers' disclosure documents to detail the priority of creditor payments, including the presence of statutory liens or other contractual obligations, Kelly said.
The MSRB stressed the importance of finalizing rules that will provide investors with information about dealer markups and markdowns on certain transactions.
In addition, because of feedback from regulators and market participants, "the MSRB in the coming year will be conducting a holistic review of its rules regarding primary offering practices with a view to enhancing existing protections under MSRB rules," Kelly said.
The MSRB said it "sees the potential risk in a rising interest rate environment," given shrinking dealer inventories of munis and an increase in mutual fund holdings.
Six years ago dealer inventories of munis were $40 billion while mutual fund holdings of munis were valued at $955 billion, Kelly said. By June 2016, dealer's muni inventories had dropped to $20 billion and mutual fund holdings were valued at $978 billion.
An increase in interest rates followed by retail investor redemptions of their mutual fund shares "could lead to market dislocation as the liquidity needs of mutual funds could exceed the willingness or ability of dealers to increase their municipal securities holdings," Kelly said.
"Though not nearly as pronounced, similar trends can be seen with separately managed accounts and municipal bond exchange traded funds," she added.
Since October 2012, the number of MSRB-registered dealers is down by 19%, Kelly noted. The decline can be attributed to dealers exiting the market as well as mergers and consolidations of dealer firms, according to the board.
"The combination of a reduction in the dealer population, a decrease in dealer holdings and increasing municipal bond mutual fund balances could lead to reduced liquidity in the municipal market," the MSRB told Fleming. "This type of market dislocation could have a significant impact on mutual fund net asset value (NAV) and the overall value of investors' municipal bond positions."
The letter also noted that the average age of the municipal bond investor is estimated to be 61 and the U.S. population is rapidly aging.
"The MSRB believes that the protection of senior and vulnerable investors is an issue of increasing importance over the coming years," Kelly said. The board would like to partner with other regulators and trade groups to help seniors understand the rules and resources in place to protect them and to help financial professionals better understand the needs of seniors, she told Fleming.
