WASHINGTON — The Municipal Securities Rulemaking Board plans to propose prohibiting underwriters from failing to disclose yield or price information for new issues of municipal bonds to information vendors such as Bloomberg or IPREO.
Currently, underwriters must disclose that information to the MSRB’s EMMA system, but not until the end of the day after the formal award of the bonds. However, when sending data to information vendors that report the data on a real-term basis, underwriters will sometimes simply send an NRO, or Not Reoffered Designation, for a transaction that masks its price and yield.
In a telephone call with reporters Monday, Alan Polsky, MSRB chairman, and Lynnette Kelly, MSRB executive director, talked about this initiative and other rules the board agreed to at its meeting in Miami last week.
They said the prohibition on NRO designations would ensure full price transparency to the market and eliminate inconsistencies in information flow.
The board also plans to issue a concept release to determine whether to propose rules, and if so to what extent, requiring disclosures of third party payments that underwriters or municipal advisors make or receive in connection with underwritings or other municipal securities-related engagements.
“There is clearly a need to address the potential for undue influence resulting from undisclosed payments from third parties in connection with engagements with state and local governments,” said Polsky. “Such influence has been cited in a series of bid rigging cases across the country and as one of the potential causes of the hardships faced by Jefferson County, Ala. and other governmental entities.”
The board also plans to propose increased requirements on underwriters related to the distribution of bonds to retail investors. Polsky said the board believes the additional requirements are needed to ensure underwriters honor issuers’ directives for so-called retail order periods in order to ensure fairer pricing for retail investors.
In addition, the board plans to publish a proposal that would prohibit underwriters from making certain changes to bond documents after they buy bonds from an issuer and before they sell or distribute them to investors unless they are allowed to make the changes under authorizing documents or the official statement. Kelly said there have been a small number of cases in which an underwriter has purchased bonds from an issuer, then as a bondholder agreed to make certain changes in bond offering documents, before selling or distributing them to investors. The MSRB wants to make sure no changes to bond documents are made that would adversely affect bondholders.
The board plans to publish a notice encouraging issuers to disclosure information about their bank loans or direct placements of bonds to EMMA. Polsky and Kelly conceded that the MSRB has no authority in this area other than encouraging issuers to make voluntary disclosures.
In other actions, the board also will soon file proposed rules governing broker’s brokers, will seek Securities and Exchange Commission approval for a revised definition of “sophisticated municipal market professional” that tracks new Financial Industry Regulatory Authority rules on suitability, and will issue a concept release to consider whether to broaden public access to so-called Section 529 college savings plans.