The Investment Company Institute is urging the Municipal Securities Rulemaking Board to expand the proposed second phase of its transparency system for short-term debt to include more types of data and documents, while the Securities Industry and Financial Markets Association is concerned that the expansion would be unduly onerous for dealers.
The two groups raised their concerns in comment letters filed with the Securities and Exchange Commission Friday, about six weeks after the MSRB proposed the final phase of its Short-term Obligation Rate Transparency, or SHORT, system.
The MSRB’s proposed changes to its Rule G-34 would require dealers to report additional bidding and program documents for auction-rate securities. The submissions would include ARS auction procedures, interest-rate setting mechanisms, and bidding information.
Dealers also would have to commit their “best efforts” to submit program documents for variable-rate demand obligations, as well as contact information for VRDO tender agents and the identities of VRDO liquidity providers. The information would be fed to SHORT and displayed on the board’s Electronic Municipal Market Access site.
ICI told the SEC that it strongly supports the changes, but recommended that the MSRB include VRDO “credit enhancement” data and documents on top of the existing program documents it plans to collect for VRDOs. Prior to the credit crisis, many VRDOs were backed with separate insurance and liquidity facilities.
“This additional information would provide investors with important information on the existence of other credit enhancements, such as insurance or guarantees, which affect not only purchase price but also general principal and interest payment obligations,” ICI associate counsel Heather Traeger wrote in the group’s four-page letter.
The market group also recommended that the MSRB create a “miscellaneous” or “catch-all” category of variable-rate securities to provide investors with material information about new products that fall outside the scope of the ARS and VRDO disclosure requirements. Though dealers have begun to provide new types of variable-rate bonds that do not have bank puts, MSRB officials said that they are being reported to SHORT.
In addition, ICI said the board should consider speeding up the time, to 30 days from the proposed 90, that dealers and remarketing agents have to submit program documents to EMMA for outstanding ARS and VRDOs once the proposal is implemented.
The group said speeding up the timing should not be unduly burdensome for most ARS and VRDOs, because dealers have been required to submit basic reset information for these products since last January and April. It also noted that the MBSB’s draft proposals originally called for 30 days and that in light of the credit crisis, the need for the information is especially “acute.”
Meanwhile, ICI said it endorsed the board’s proposed one-business-day submission requirement for new or amended versions of ARS and VRDO documents.
However, SIFMA contended in its eight-page letter that the MSRB proposal would be “onerous and costly in comparison to its benefits,” and urged the SEC to conduct a cost-benefit analysis. The association made a similar request to the board last fall when it released draft rule changes to expand the system.
Though the MSRB tried to accommodate industry concerns by proposing dealers submit a document containing auction information rather than Treasury security auction-like data, SIFMA said it is no longer certain this would minimize its members’ burdens.
On further reflection, the group said, some of its members still feel a document would be an easier form of submission, “but other members feel a data-element level of submission would not only be easier but also a superior method for data management and analysis.”
In addition, the industry group objected to making broker-dealers responsible for filing information in agreements to which they are not parties or to which they cannot gain ready access, such as VRDO liquidity facilities, which typically are entered into between an issuer, a bank liquidity provider, and the trustee.
Even with a “best efforts” requirement, dealers would be at increased regulatory risk for documents that are out of their control, and they will have to document that they used their best efforts to obtain them, SIFMA warned.
The industry group said it believes that in many cases, official statement summaries of ARS and VRDO program documents are sufficient, and that dealers should not be required to make any additional filings.
But if regulatory action is deemed necessary, SIFMA suggested the SEC consider changes to its Rule 15c2-12 on disclosure to require issuers, rather than dealers, to disclose documents related to a substitution or replacement of a VRDO liquidity facility as well as new or modified program documents.
Similarly, the trade group said it does not believe dealers are the proper parties to be held legally responsible for submitting to EMMA the identity of tender agents and liquidity providers, or identifying individual VRDOs for which an issuer provides “self liquidity.”
Under 15c2-12, dealers are restricted from underwriting new securities unless the issuer has contractually agreed to disclose annual financial and operating information as well as notices of 12 types of material events, including rating changes and the failure to timely file annual financial information.
The SEC, in a separate rulemaking action, is considering a proposal to expand the quantity of events that issuers must disclose on a continuing basis — as well as removing an exemption for VRDOs from continuing disclosures.
In contrast to ICI, SIFMA said that a one-business-day submission requirement is unreasonable for new or amended program documents, and instead recommended five business days.