SEC Investor Advocate, dealer groups split on MSRB proposals

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WASHINGTON - The Securities and Exchange Commission's Investor Advocate is at odds with broker-dealers over how much data they should have to provide in connection with new offerings of municipal securities.

The differences became clear in responses that SEC Investor Advocate Rick Fleming, the Securities Industry and Financial Markets Association, and the Bond Dealers of America submitted to the Municipal Securities Rulemaking Board’s request for comments on draft amendments to its Rules G-11 on primary offering practices and G-32 on disclosures in connection with primary offerings.

The MSRB published the proposed amendments in July after a broader request for comment on primary offering practices late last year.

The amendments would require additional data about new muni bonds to be included on Form G-32 and would auto-populate data from the New Issuer Information Dissemination Service (NIIDS) onto Form G-32.

The NIIDS system, developed by the Depository Trust Company at SIFMA’s request, collects information about a new muni issue from underwriters or their representatives in an electronic format and then makes that data immediately available to vendors that provide such information to market participants.

Form G-32 is submitted to the MSRB by underwriters and provides information about a new issuance, such as the underwriting spread, maturity date, initial offering price, minimum denomination, and more.

Among the questions the MSRB asked in its request for comments was whether Form G-32 should be auto-populated with new data points from NIIDS as well as whether the MSRB should require new information to be included on Form G-32 that would not be auto-populated from NIIDS.

SIFMA and BDA voiced no objection to auto-populating Form G-32 with some new information that is already submitted to NIIDS.

“The auto-population of data elements on Form G-32 poses no clear new burden on the underwriting community, as long as they are auto-populated,” wrote Leslie Norwood, a managing director, associate general counsel, and co-head of munis at SIFMA.

Norwood said that minimum denomination information supplied this way would help the market as a whole to avoid trading below that amount, but added the caveat that the underwriter that submits the initial NIIDS data should have no obligation to update that information over the life of the bonds.

BDA Chief Executive Officer Mike Nicholas said that the BDA has no objection to auto-populating information from NIIDS into G-32, but is not recommending it.

Fleming, whose office was established in 2014 with him at the helm as the commission's first Investor Advocate, is tasked with being a voice and a resource for investors, particularly retail investors. Fleming’s comment letter supported both auto-populating and requiring new manually-entered data on Form G-32.

The information that would need to be manually entered would include a “yes or no” indicator about whether a minimum denomination is subject to change. It would also include the identities of additional syndicate managers, the call schedule for callable bonds, information identifying the “obligated person” responsible for making interest payments, refunding information, retail order period information, and the name of the municipal advisor.

Fleming voiced support for including all of the new information, and added that the MSRB should go further and place the responsibility on dealers to disclose changes in minimum denomination requirements rather than requiring only a yes/no indicator that the denomination can change over the life of the security.

“The MSRB states that the addition of this indicator on Form G-32 would remind market participants to check relevant bond documents for developments that could trigger a change in the minimum denomination,” Fleming wrote. “Although we agree that this would trigger a reminder to market participants, we believe this does not go far enough to help ensure that current, accurate information is easily accessible to investors and other market participants. Without an ongoing obligation to update information regarding changes in minimum denomination over the life of the security, the burden shifts onto the investor to decipher the relevancy of events that could trigger a change in the minimum denomination.”

SIFMA and BDA raised some objections to having to manually enter information not currently required.

“SIFMA and its members are concerned about the additional burdens on the underwriting community to add a significant amount of data to Form G-32 that needs to be manually input,” Norwood wrote. “SIFMA is also concerned about some of the proposed fields to be required, such as the full call schedule. This information is in the official statement, and would be burdensome for the underwriter to re-key in.”

SIFMA suggested that a link to the official statement could satisfy the MSRB’s aim and appeared to leave the door open to collecting information regarding retail order periods by CUSIP. That possibility “may need more thought, given the variety of retail order period structures, and the fluid process that can change demand intra-day,” Norwood wrote.

Nicholas threw his group’s support behind a yes/no indicator for changing minimum denominations and a new data point naming the obligated person. The other concepts met with disapproval. On the point regarding identifying the municipal advisor, for example, Nicholas said such information simply isn't valuable.

“The BDA objects to this data field,” he wrote. “The information is obtainable from the final official statement and does not represent valuable information in the secondary market trading of municipal securities.”

The National Federation of Municipal Analysts also weighed in, generally voicing support for the new proposals as well as others, such as requiring non-dealer muni advisors to make a preliminary official statement available to the managing or sole underwriter as soon as the issuer approves it.

The NFMA letter, signed by NFMA Industry Practices & Procedures Committee Co-Chairs Julie Egan and Lisa Washburn, also expressed concern about some investors and rating agencies receiving non-public information from issuers to the detriment of other investors.

“The NFMA urges the MSRB to address all issues of unequal and unfair disclosure in the municipal bond market,” the two wrote.

The MSRB can choose to withdraw its proposed amendments, amend them, or send them to the SEC for approval unchanged.

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Primary bond market Secondary bond market MSRB rules Securities law SEC MSRB SIFMA BDA NFMA Washington DC