Muni market groups want the Securities and Exchange Commission to withdraw a proposed submission calculator that would more visibly track the timeliness of secondary market disclosures.
In a letter submitted to the SEC this week, a a working group representing several municipal market groups asked the SEC to reject the calculator proposal, stating that the Municipal Securities Rulemaking Board did not reach out for input beforehand.
“In many past proposals, the MSRB proposal development and rulemaking process has included opportunities for input through notice and comment or for beta-testing the function,” the group wrote. “Unfortunately, this proposal did not receive the benefit of that input.”
The SEC asked stakeholders to submit comments due Wednesday on the proposed amendment to EMMA Information Facility IF-3, which outlines the basic functions of the EMMA site. The change would not require extra work from issuers.
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The new feature would provide an informational box including a link to the disclosure of annual information and/or an audited financial statement for the most recent fiscal period and the end date of the financial period detailed in the disclosure. It would also include the date the disclosure was posted to EMMA and a static calculation of the number of days between the posting of the first disclosure for that fiscal period and the end date of the financial period detailed in that disclosure.
The working group, organized by the Government Finance Officers Association, also wants user focus groups to search for improvements and to avoid unintended consequences, such as inconsistent and unclear data.
The letter was signed by the National Association of Bond Lawyers, National Association of Municipal Advisors, National Association of State, Auditors, Comptrollers and Treasurers; National Association of Health and Education Facilities Finance Authorities and the National Association of State Treasurers.
The calculator will result in ambiguous information at best and misleading information at worst, wrote Emily Brock, director of GFOA’s federal liaison center in a separate letter to the SEC.
GFOA is concerned that some issuers would be unfairly judged by investors that information may not be timely when it is submitted as timely as possible and within the timeframe in its continuing disclosure agreements.
Under SEC Rule 15c2-12, issuers have to enter into CDA, a contractual document between the issuer and investor.
“Investors agree to the parameters of that disclosure time frame upon purchasing the security,” Brock wrote. “If an issuer is out of compliance with the CDA, then the issuer must make a material event filing which can readily be viewed by investors.”
A CDA can require different types of filings such as audited financial information, which could be filed more quickly or comprehensive audited financial information, which would take longer, Brock said. Audited financial information may just include a component unit, while comprehensive audited financials would include every component unit overall.
An investor could believe that all credits are similar in information they provide to EMMA, when in reality component units could be filed relatively soon after the end of the fiscal year and not a government’s comprehensive financial information, Brock wrote.
Many issuers have multiple documents to comply with their CDAs, said Kenton Tsoodle, Oklahoma City's finance director.
For example, if issuers filed three different documents to meet their CDA requirements, Tsoodle wondered if the calculator would take into account just the first document filed.
“That is a major issue because I can potentially file a document one day after my fiscal year end, but the other documents aren’t ready for 150 days, so which date is really relevant?” Tsoodle said. “Is it the date that the complete disclosure is filed or is it the date the first disclosure is filed?”
NAHEFFA is supportive of maintaining and enhancing disclosure practices, they wrote their own separate letter, but do not believe the proposal is ready for “prime time.”
“As far as we can ascertain, it was developed solely internally within MSRB without consultation with any stakeholder,” wrote Chuck Samuels, NAHEFFA general counsel. "Nor are we aware to what extent, if any, it has been tested in trial or mock disclosures for a variety of issuer and borrower types, governmental and nongovernmental, including for conduit issuances.”
Samuels was concerned that inevitable errors may not be corrected or overridden, and especially for conduit issuers, if an error would be attributable to a single borrower could end up being a “contagion” for the conduit issuer as a whole.
“If this information exists on a CUSIP by CUSIP basis what is the possibility that some will aggregate the information at some point and draw conclusions based on an aggregate result which could be terribly unfair to many other borrowers and an issuer?” Samuels wrote.
Samuels was also concerned about preventing “gaming” of the system through mislabeled information such as submitting placeholders for annual and other financial disclosures.
Pooled financing also brought questions and Samuels was concerned as to how financing with borrowers who could have different fiscal periods will be handled without providing misleading information.
The National Federation of Municipal Analysts released its
