WASHINGTON - The Securities and Exchange Commission has approved rulemaking changes to designate the Municipal Securities Rulemaking Board's EMMA system as a free, centralized repository to which issuers must file bond-related secondary-market disclosure documents beginning July 1, and is considering additional rulemaking to boost municipal disclosure standards.
In an interview, SEC chairman Christopher Cox said the SEC's trading and markets division has recommended regulatory changes to improve municipal disclosure and that the commission may consider them in the coming weeks, though currently other securities issues are more pressing.
The long-awaited EMMA-related amendments to the commission's Rule 15c2-12 on disclosure, which SEC members approved unanimously on a "seriatim" basis, or individually rather than at a public meeting, are to be publicly announced Monday.
The amendments designate EMMA as the sole nationally recognized municipal securities information repository, or NRMSIR, beginning July 1, 2009. The commission plans to retract the "no-action" letters it has sent to each of the four existing NRMSIRs. The letters stated that the staff would not recommend enforcement action if broker-dealers used the facilities to meet their municipal disclosure obligations.
Cox said the changes to 15c2-12 represent "a giant step toward bringing municipal disclosure up to the level of corporate disclosure."
"As a result of the initiative that the SEC and the MSRB have taken, investors for the first time will have ready access to disclosure documents about municipal securities over the Internet, instantly and for free," he said. "It's an enormous change for the better."
Ron Stack, chairman of the MSRB and managing director and head of public finance at Barclays Capital, said, "This paves the way to a completely new era of comprehensive disclosure information."
Under the SEC's Rule 15c2-12, dealers cannot underwrite most muni securities unless issuers have agreed in writing to file annual financial and operating information and notices of material events with the NRMSIRs.
But when the NRMSIR system was put into place in the 1990s, some issuers did not send disclosure documents to all four repositories and when they did, the document were often labeled and maintained differently. This made it difficult for broker-dealers to check issuers' disclosures, something they must be able to do under 15c2-12 before recommending bonds to issuers. It also made it difficult for investors to obtain disclosure information.
The establishment of a mandatory repository comes after years of work by market participants to improve on the NRMSIR system. MSRB officials first expressed an interest in becoming a repository in the early 1990s. But electronic disclosure was still relatively new and the board did not have the support of issuers, who feared the MSRB would try to regulate them, or private vendors who wanted to obtain and provide the information to market participants. As a result, the SEC embraced a decentralized approach, allowing private parties to apply to become designated as NRMSIRs.
Initially there were seven NRMSIRs, but several firms pulled out of the business. In 2004 the Muni Council, which consists of about 20 muni market groups, tapped the Municipal Advisory Council of Texas to create and operate a central post office facility. The CPO served as a one-stop filing place for issuers' secondary market disclosures and eliminated the inconsistencies in the filing and maintaining of documents. But issuers were never required to use it.
Support for the MSRB's creation and operation of a mandatory central repository arose last year after Cox unveiled a series of initiatives to boost municipal disclosure and accounting standards, including the creation of a free Web site, similar to the SEC's EDGAR system, through which investors could easily access disclosure information. The MSRB offered to provide the system.
Though the idea gained traction throughout the industry, unlike most of the other initiatives, at least two NRMSIRs - Fort Lee, N.J.-based DPC Data Inc. and Standard & Poor's Securities Evaluation Inc., a subsidiary of the McGraw-Hill Cos. - warned or indicated EMMA would harm their businesses and showed some opposition to the system. The other two NRMSIRs are Interactive Data Pricing and Reference Data Inc. and Bloomberg Municipal Repository.
In its 16-page comment letter, Standard & Poor's said: "Replacing the current system of private vendors with the MSRB as the single, exclusive official repository and disseminator of municipal securities disclosure raises concerns about the potential adverse effects of eliminating competition from the existing system."
But SEC officials contend that any harm to the existing NRMSIRs would be more than offset by the anticipated benefits from the new system, including the potential for additional information vendors to come into the market, using the EMMA data for value-added products.
Philip Moyer, the president and chief executive officer of the information vendor EDGAR Online, applauded the move toward a centralized system. He said the next step is for the municipal market to embrace XBRL data tags for its financial reports, which would allow investors to better compare the financial results of issuers. Though no comprehensive taxonomy, or set of XBRL tags, yet exists for state and local government financials, Moyer said the muni market could leverage the existing taxonomies for publicly registered companies and could create one of its own in about a year.
Currently EMMA has been functioning in a pilot format since late March, but only for historical primary market information and ongoing trade data from the board's real-time transaction reporting system.
Though EMMA will function as an expanded, single system when completed, it is actually the combination of several different platforms, including a primary market "access equals delivery" portal that the board hopes to launch by the end of the year. Under that system, dealers will be able to electronically post official statements for bond issues in lieu of having to send paper copies to investors.
Another component of EMMA that the board plans to roll out early next year in three phases will provide price transparency, bidding information, and documentation for the short-term auction-rate securities and variable-rate demand obligation markets. The first phase of the system, dubbed SHORT, or the Short-term Obligation Rate Transparency System, will be launched on Jan. 30, 2009. Information submitted through SHORT will be displayed on EMMA.
Though the continuing market disclosure component of EMMA will begin operating July 1, the board plans a three-month pilot period for issuers to get used to using the system, beginning sometime in the spring. In addition, the board will require that all secondary-market submissions be made in PDF format beginning Jan. 1, 2010.