WASHINGTON — A diverse group of municipal market participants has criticized the Municipal Securities Rulemaking Board's recent concept release related to third-party payments.
In comment letters filed in recent days, groups representing dealers, bond lawyers and non-dealer municipal advisors all argued that additional disclosures of third-party payments could raise issuers' costs and create undue administrative burdens for the industry, without significantly improving market efficiency or transparency.
The letters respond to an MSRB "concept proposal" released in May that sought public feedback about whether to require underwriters and municipal advisors to disclose third-party payments through the EMMA system. The board also asked whether it should "permit" issuers to disclose fees paid to transaction participants.
"We urge the MSRB to consider the minute incremental value, if any, of public disclosure of all third-partry payments" made by dealers, Mike Nicholas, chief executive of Bond Dealers of America, wrote in a comment letter.
Leslie Norwood, co-head of the municipal securities division at the Securities Industry and Financial Markets Association, wrote that existing MSRB rules and notices already address certain third-party payments and disclosures. Among those, she said, is the MSRB's new interpretive guidance to Rule G-17, which was effective Thursday. "If parties are intent on violating those existing laws, layering on yet another level of disclosure regulation will not halt them," she wrote.
The third party payments referred to in the MSRB's proposal include payments received by underwriters from third parties in exchange for financial recommendations, and payments from recommending that a third party participate in a transaction. The board also mentioned fees underwriters pay to third parties to obtain or retain work on new offerings.
The MSRB also sought feedback on the disclosure of incentives paid by municipal advisors to third parties, incentives received from third parties for recommendations and incentives for soliciting issuers' business.
Only one of eight letters, submitted by the head of muni-market information firm Bondview.com LLC., expressed widespread support for the proposal.
"The level of disclosure proposed by the MSRB will probably not cause a administrative burden to a great majority of the municipal issues, and have little nor no administrative impact on the small minority of issues that would need to make such disclosures," Bondview.com CEO Robert Kane wrote. "Additional disclosure is a small price to pay in exchange for the investing public to have more faith in the marketplace."
SIFMA and others argued that the board should not require disclosure of payments made "in the ordinary course of business," such as fees for services like advertising, copying, analysis, printing and electronic publishing. Also, rating agency and CUSIP fees, and fees paid to the Depository Trust & Clearing Corporation should be exempt, SIFMA said.
The group also urged that payments underwriters make, at the direction of issuers, to financial advisors, bond lawyers and trustees, be exempt.
Requiring the disclosure of those expenses, SIFMA said, could discourage underwriters from acting as an intermediary and raise issuers' costs.
Colette Irwin-Knott, president of the National Association of Independent Public Financial Advisors, urged the board to exempt payments made to parties performing "bona fide standard functions."
She said posting third-party payments on EMMA would have limited value because issuers receive that information from underwriters or municipal advisors.
Robert Coulter, senior vice president and chief administrative officer at First Southwest, said rules should only require disclosure of payments "that represent a conflict of interest, and not those made in the normal course of business."
Nicholas said BDA supports transparency, but that third-party disclosures should be "limited to those payments or receipts that have a direct connection to the activity the MSRB is trying to prevent."
Norwood and others called requirements for municipal advisors premature, noting that the Securities and Exchange Commission has not finalized its municipal advisor definition. The SEC has said it will finalize the definition by the end of the year in final registration rules.
The board also requested comment about permitting issuers to voluntarily disclose, on standardized forms, fees paid to bond counsel, trustees and other transaction participants. In addition, the board asked market participants if issuers should be allowed to submit state filings, which can include fees details.
The National Association of Bond Lawyers' letter noted that no rules prohibit issuers from filing such information. The group said information in state filings or standardized MSRB forms could be difficult to compare and possibly misleading.
The MSRB said its proposal is designed to address concerns that third-party payments may have presented "significant challenges to the integrity of the municipal market." Undisclosed third-party payments "allegedly occurred in connection with activities that may have contributed" to the 2011 bankruptcy of Jefferson County, Ala., it said.
SIFMA argued that those cases "should be clear enough evidence that there are statutes and regulations in place to prohibit the kind of fraudulent activity" that new disclosure rules would target.
Tamara K. Salmon, senior associate counsel at the Investment Company Institute, said ICI is primarily concerned with the impact on 529 college plans, which are "fundamentally different" from muni bonds. She asked the MSRB to address 529 disclosures in a separate concept release.