WASHINGTON - After years of complaining about the shortcomings of the secondary-market disclosure system, municipal groups are finally poised to take major action in the coming year to improve it.
So it's not surprising that disclosure, along with price transparency and derivatives, will be key areas of focus in the securities arena of the municipal market in 2003, more than a dozen market participants said in recent interviews.
"This is the year that something gets done by the Muni Council," said Martha Mahan Haines, the chief of the Securities and Exchange Commission's Office of Municipal Securities. "Something will be done to fix the system so that it works. The focus for me will be on the Muni Council and its trying to make the changes that are needed for the nationally recognized municipal securities information repository system to work as it was intended to."
Alan Anders, the outgoing chairman of the Government Finance Officers Association's debt committee, agreed.
"I do think that a year from now we're going to know whether or not it will have made sense, through the Muni Council's efforts, to try to set up an electronic mailbox so that issuers can send their secondary-market disclosures to one place," said Anders, the manager of debt and fiscal policy for New York City. "I think right now there's a consensus that it probably will happen because it would help issuers with compliance. It would help investors knowing that when they go the NRMSIRs, they will have all of the filings, not just some. And it would help the NRMSIRs in collecting all of the information that they are required to have. So there does seem to be some momentum."
"I think the players are at the table. The incentive and the will are there," said the GFOA debt committee's incoming chairman, Monique Moyer, director of the mayor's office of public finance for the city and county of San Francisco. "The difficulty is finding one solution that fits everyone, but I expect we'll find the means. If it doesn't happen now, the chances of its happening in the future are not good."
"This will be an important year to have something happen," agreed Helen Atkeson, the president of the National Association of Bond Lawyers and a partner at Hogan & Hartson in Denver. Atkeson said that if the Muni Council does not move forward on these issues, "people will not feel that it's been a good use of their time."
Haines is expected to complete a report next year that summarizes the findings of her office's study of the NRMSIR system. The study will describe the problems that the SEC found, recommend possible fixes, and detail the workings of the Muni Council, which is trying to come up with market solutions to the NRMSIR system.
It is not yet clear whether the SEC report will be released to the public. But Haines has said the study supports many of the complaints made about the system -- that some issuers are not complying with their 15c2-12 obligations, that issuers who do disclose do not always file their documents with all of the NRMSIRs, and that the repositories sometimes make mistakes indexing the documents and do not all have the same documents.
The Muni Council -- which is made up of more than 20 market groups and is working to try to improve secondary market disclosure -- is expected later this month to send out a request for proposals for the development of a central post office. This new facility would collect issuers' disclosure documents and then disseminate them to the four existing NRMSIRs and three existing state information depositories. Council members have not yet decided whether the post office would also index or store the disclosure documents. The storage activities could make the facility look more like a full service central repository.
CONTROVERSIAL DISCLOSURE ISSUES
But there are two possibly contentious issues that Muni Council members are putting on the back burner for now but that could ultimately derail the process. One is tabulating the costs of developing and maintaining a central post office facility and deciding who will pay those costs. The other is deciding whether changes to the SEC's Rule 15c2-12 on disclosure are needed to put such a facility in place -- and, if so, how far those changes should go.
The cost issue could be fractious, market participants agreed. The current NRMSIR system is paid for by investors, analysts, and dealers who subscribe to the NRSMIRs' information services for disclosure data. Few buy documents from the repositories. Investors have long complained that they should not have to pay for disclosure information to keep tabs on the securities they bought and hold.
There has been some talk among some Muni Council members of shifting the costs to the issuers and making them part of the costs of doing a transaction. One possible idea raised, though not yet discussed by the group, is charging one cent per $1,000 par value of new offerings, which would generate $2 million to $4 million per year.
Anders said it's too early to talk about costs. "We don't exactly know what it is we would be funding or how much it will cost," he said.
"They have to decide-- is it going to be a simple post office or is it going to have other aspects to it," agreed Christopher Taylor, the executive director of the Municipal Securities Rulemaking Board. "They don't even know what they're going to do yet."
One thing is certain: the MSRB will not be responding to the Muni Council's RFP, even though some broker-dealer officials have said the board has a track record of collecting municipal securities documents and would be a logical candidate to operate such a facility.
"We cannot respond to the RFP," Taylor said. When the SEC approved the board's setting up a Municipal Securities Information Library to collect official statements and escrow documents from muni offerings and refunding, the commission made clear that the MSRB could not compete with the private sector, he said.
The issue of possible changes to Rule 15c2-12 also could be contentious, sources said.
Investor groups -- in particular the Investment Company Institute and the National Federation of Municipal Analysts -- have called for the rule to be toughened so that the exemptions to secondary market disclosure requirements are narrowed or eliminated for short-term and variable-rate debt, and the list of events for which material event notices must be filed is expanded. Haines has asked Muni Council members to consider these issues.
But dealer, issuer, and bond lawyer groups are opposed to any substantive changes in the rule. The Bond Market Association, issuer officials, and bond lawyers said they hope the disclosure dissemination system can be improved without any amendments to the rule.
"I think issuers generally have a presumption against changes to 15c2-12," Anders said. "They have a presumption against any new regulation of the municipal market. We think our market is working pretty well. We'd rather ask, 'Is there any way to make these improvements without rule changes?'"
"It would be nice to accomplish this without any changes to the rule," said Lynnette Hotchkiss, TBMA's senior vice president and associate general counsel.
"The rule itself is fine," agreed Ronald Stack, a managing director and head of the public finance department at Lehman Brothers who is to take over as chairman of TBMA's municipal securities division on Jan. 1.
But Haines said: "To make it mandatory for issuers to file with a newly created post office would require us to amend or interpret the rule in some way. To set it up for voluntary use would require little or no action from us."
Peter Bianchini, the NFMA's chairman and a vice president of research at Charles Schwab Investment Management Inc. in San Francisco, said that the analysts group is hopeful that the SEC and market participants will consider further changes to 15c2-12.
"I think we'll continue to focus on content," he said. "If we create this great new system but we ignore the content, then I think we've missed the goal to have a better repository system where people can get useful information." The NFMA is expected to continue issuing a series of recommended disclosure practices for various sectors of the market and is currently working on recommendations for airport-related financings.
Haines said that once the filing and dissemination system is fixed, "my office will continue to look further" at possible improvements that could be made to the secondary market disclosure system.
"Whether the Muni Council also looks at further at possible rule changes or not I cannot say," Haines said. "There's much more of a consensus in the industry about the mechanical changes that are needed to make the NRMSIR system work effectively than about other possible changes to the rule such as those suggested by the ICI and NFMA."
PRICE TRANSPARENCY
Price transparency is also expected to be an area of focus during the coming year because of the securities industry's plans to move in mid-2004 to real-time reporting of prices from trades and because of the SEC's urging of the MSRB to move more quickly to improve its transaction reporting system, sources said.
The MSRB plans to propose system specifications and testing schedules for the municipal market's anticipated move to real-time reporting of prices from trades. Real-time means that prices would be reported soon after the trades occur.
In addition, the MSRB is expected to weigh whether it should try to make further improvements in price transparency before the move to real-time price reporting. The board currently makes available to subscribers, on a next-day basis, the prices from municipal securities that trade two or more times a day. It makes prices from all other trades available with a one-week lag time.
Outgoing SEC chairman Harvey Pitt urged the MSRB earlier this year to move more quickly to improve price transparency. The board's transaction reporting program, which has been in place since 1995, originally was to move to real-time price reporting in 1998. That deadline was delayed so the industry could first move to straight-through processing of trades, rather than the end-of-the-day batch processing that currently takes place. Straight-through processing is being developed in connection with the industry's move to a T+1 trading system in which trades would be cleared and settled within one day.
TBMA recently announced that it is setting up a task force under Richard Kolman, managing director and co-head of the municipal bond department at Goldman, Sachs & Co., to study whether further improvements in price transparency would hurt liquidity in the municipal market or provide misleading pricing information to investors.
Kolman is the incoming vice chair of the associations municipal securities division. TBMA officials have said they support intra-day price reporting of frequently traded securities but are concerned about price reporting for muni securities that rarely trade.
Meanwhile, Kevin Olson, a former trader and current sponsor of a Web site, www.municipalbonds.com, that posts muni securities pricing information, is expected to re-file his lawsuit against Wall Street and other broker-dealers in a California state court. Olson claims the dealers violated federal and state securities laws and rules by allegedly excessive markups and markdowns on muni trades.
Olson's lawyers from the firm of Milberg Weiss Bershad Hynes & Lerach initially filed the lawsuit as a "private attorney general action" on behalf of investors in the San Francisco County Superior Court last year. But lawyers for the dealer firms transferred the suit to federal court and asked that it be dismissed. Olson withdrew the suit and vowed to re-file it in state court without referring to any federal rules or standards. The dealers have refused to comment on that suit.
DERIVATIVES
Another area of focus will be derivatives because of their growing use in the municipal market and because of a major review of derivatives that has just been launched by the Municipal Securities Rulemaking Board.
Hill A. Feinberg, the board's new chairman who is also chairman and chief executive officer of Dallas-based First Southwest Co., has said the board is just trying to get up to speed on, and fully understand, the use of derivatives in the municipal market.
But the MSRB has no power to regulate or even issue guidance on derivatives because they are not deemed to be securities, Feinberg and Taylor said.
"If it's not a securities transaction, we can't touch it," Taylor said. "But it's the board's responsibility to be on top of things, and we're just trying to educate ourselves about derivatives."
TBMA's Stack and Kolman said they welcome the MSRB review. "The more people know about derivatives, the more willing they are to use them effectively and, most importantly, appropriately," Stack said. "We believe the derivatives markets are working extremely well and provide a tremendous benefit to issuers."
The TBMA officials and Anders said the municipal market is just catching up to the corporate debt market on derivatives. "I think there's been a breakthrough in 2002, with the use of swaps and option-based products by issuers, in terms of the magnitude of transactions and the number of issuers using them," Anders said.
He added that his experience with derivatives transactions make clear that they are "legitimate and important for issuers to be using, whether to create greater financial flexibility or reduce the financing cost of debt."
"We're just really catching up to the potential that the corporate sector has realized for some time," he said.
Also next year, the SEC is expected to decide whether to approve the changes the MSRB proposed to its Rule G-37 on political contributions. The revisions -- which would provide, under very limited circumstances, an automatic exemption to a muni broker-dealer or one of its municipal finance professionals from the rule's temporary ban on business which is triggered by political contributions made to issuer officials -- will make the rule more workable and less burdensome for dealers, the board claims. The rule, which is aimed at preventing broker-dealers from engaging in pay-to-play practices, generally bars a firm from doing negotiated municipal securities business with an issuer if the firm or one of its muni finance professionals makes significant contributions to an issuer official who could influence the award of bond business.
The SEC also is reviewing an MSRB proposal that would allow the board to shut down the municipal securities market in the event of a catastrophe that disables critical market systems. The board filed the proposal with the SEC earlier this month after being asked to do so in the wake of the Sept. 11, 2001, terrorist attacks, which crippled or destroyed some Wall Street firms. TBMA has opposed the proposal, claiming the board is making a "power grab" which is not warranted since the muni market continued to operate after the Sept. 11 attacks. But Stack and Kolman said last week that TBMA plans to hold discussions with the MSRB to try to "come to some common ground."
