WASHINGTON — The Municipal Securities Rulemaking Board released details Monday about several initiatives that could tighten regulation or increase transparency in the municipal securities market.
In a media call recapping highlights of the group’s board meeting here last Wednesday through Friday, MSRB officials said the board plans to consider reducing the amount of time dealers have to report trades, as well as measures that would require dealers to report, on the EMMA system, the exact size of trades of more than $1 million soon after those trades occur.
Officials also said the group plans to prohibit underwriters from consenting to any changes to bondholder documents, and is pursuing other measures designed to reduce conflicts of interest and ensure more information about municipal bonds is available to investors on the MSRB’s EMMA website.
Some of the initiatives were criticized by some industry leaders, who said they fear the measures will lead to new administrative burdens for businesses.
The board decided to publish a so-called concept release that will ask market participants about the idea of reducing the amount of time that dealers have to report trade data to the MSRB.
Currently, they must report most trades within 15 minutes from when they are executed.
The board also said it would also caution dealers against delaying trade reporting until the last possible moment, and against disclosing data to favored customers before sending it to the MSRB.
MSRB officials would not say how much time the 15-minute window might be cut.
“We are going to engage the market in a discussion. I am not going to speculate as to whether or not that goes to real time or to a shortened time frame,” said MSRB chairman Alan Polsky, senior vice president of Minneapolis, Minn.-based investment firm Dougherty & Co.
MSRB executive director Lynnette Kelly said most firms already report data within just five minutes of when trades are executed.
“But remember, we have a very diverse dealer community, with some that have direct feeds into the Depository Trust & Clearing Corp. and then to the MSRB. Others report their trades via a web-based service so we want to make sure that whatever we do is sensitive to the vast differences of the dealers in this market,” she said.
Many firms have been fined for late trade reporting during the past few years, but the Financial Industry Regulatory Authority was unable to provide data on how many.
Mike Nicholas, chief executive of Bond Dealers of America, said many dealers already struggle to comply with the MSRB’s 15-minute trade reporting requirement and that giving them less time will only exacerbate existing problems, such as reporting errors.
He said there is already uncertainty about when the clock starts ticking.
“[What happens if] a trader is on the phone and an investor places an order and wants to call back [to discuss] allocation? Has the trade taken place?” he said.
Leslie Norwood, co-head of the muni division at the Securities Industry and Financial Markets Association, said, “SIFMA does have some concerns about the practicability of reducing the trade reporting timeframe.”
The MSRB also may propose rules changes on requiring dealers to disclose the exact amounts of trades over $1 million soon after they occur. Since 2005, such trades have been displayed on EMMA as “1MM+” for five days after they are executed.
“It makes sense to have full disclosure of those amounts,” Polsky said. “I think it’s a step in the right direction. I don’t think it should be that controversial.”
Trades in excess of $1 million accounted for 77% of the $3.28 trillion in municipal securities that traded in 2011, according to the MSRB’s 2011 Fact Book. Those trades represented 4% of the number of trades — 41,241 — conducted that year.
The board also expects to publish new proposed rule changes that would prohibit underwriters from consenting to changes in the bond documents for new munis, even if the documents permit dealers to do so.
The board has proposed that underwriters only be restricted from agreeing to changes that would affect the security of existing bondholders.
But Kelly said the changes are needed because underwriters do “not have the same long-term economic interest in the bonds that a traditional bondholder would have.”
The MSRB board also decided to file with the Securities and Exchange Commission final rule changes that would prohibit dealers from designating new munis as “not reoffered” or “NRO” unless they also provide initial price and yield information on those securities.
Polsky said the MSRB will likely file the rule with the SEC in the “not-too-distant future.”
In addition, MSRB officials said the board is working to improve the process by which issuers submit continuing disclosure documents to the EMMA system.
The board said it will help state and local governments understand how to best disclose financial information, explore ways to refine the submission process and may create new submission tools.
In addition, the board said it will work to help investors understand the different types of information that should be available on EMMA.
“We think local governments can benefit from education about the best way to use the EMMA Website to fulfil their annual reporting obligations,” Polsky said.
He added that the initiative does not come in response to a specific concern about disclosure.
Kelly added, “We have two and one half years of experience with the EMMA system accepting continuing disclosures. … We want to make sure we’re doing everything in our power — and obviously we don’t regulate issuers — to make the system for issuers [and] investors easier to access.”
The board also said it will examine if rules established in 2010 are adequate to address conflicts of interest that might arise when dealers to contribute to bond-ballot campaigns.
Polsky noted that the board is still collecting data, and he called “premature” a suggestion that the board would seek to expand its Rule G-37 to address bond ballots.
Rule G-37 prohibits dealers from doing business with issuers if the dealer made more than $250 in political contributions to an official at the issuer.
The board also said Monday that it expects to discuss with the market the possibility of collecting additional information from dealers about 529 college savings plans. Information that could be collected includes plan assets, contributions and withdrawal amounts and financial performance. The MSRB currently collects 529 plan disclosure documents, but not other information.
Nicholas said his group supports “effective and efficient” regulation, but he fears some MSRB initiatives will place costly burdens on businesses.
“Dealers’ margins are shrinking while costs and regulation is increasing. One consequence [could be] that smaller dealers get out of the business. How does that benefit individual investors?” he said.
Nicholas also fears the MSRB will prohibit dealers from making contributions to bond-ballot initiatives, which could mean some potential projects never receive funding. “Dealers are providing a real service for issuers that don’t have the resources to fund a [communications campaign],” Nicholas said.
Nicholas also questioned the existence of the problems that MSRB says its trying to fix.
“Like with many regulations that get proposed, we are concern about regulators solving a problem that doesn’t really exist,” he said. “Is there a real problem that will be solved by the industry reporting trades in less than 15 minutes. And if there’s not [a problem], why explore it?”
Norwood added that SIFMA is pleased that the MSRB plans to assist issuers with disclosure submission, and said the group will review with its members the MSRB’s initiatives.
MSRB officials declined to give estimates of when their priorities will be completed.
“Staff have to go back to all the things that happened at the board meeting and look at the time schedule, so that when stuff comes out … [it] is as thoughtful as it needs to be,” Polsky said.
