WASHINGTON - The Securities and Exchange Commission is expected to designate the Municipal Securities Rulemaking Board's EMMA system as the sole repository for issuers' secondary market disclosure documents "very soon," SEC chairman Christopher Cox said yesterday. The move came after the commission voted on unrelated proposals to boost transparency and reduce potential conflict of interests at credit rating agencies.
The five-member SEC is expected to approve the EMMA proposal on a "seriatim" basis, in which the commissioners sign off on it individually rather than at an open meeting. The proposal would amend Rule 15c2-12 on disclosure to designate EMMA as a free, centralized repository for continuing disclosure documents, effectively replacing the four existing nationally recognized municipal securities information repositories, or NRMSIRs.
"Obviously getting better disclosure to investors in municipal securities is an especially acute interest of the commission now that municipal markets are under stress as a result of the credit crisis," Cox told reporters following yesterday's open meeting.
Typically, the agency uses seriatim voting to approve noncontroversial measures. But the technique also has been used when there has not been enough time to call for an open meeting, such as earlier this fall when the SEC approved an emergency order to temporarily ban short selling against financial institutions.
The SEC proposed the changes to 15c2-12 in July. Last month, the MSRB requested that the commission delay until July 1, 2009, the implementation of the proposed continuing disclosure component of EMMA so that muni issuers and others will have more time to familiarize themselves with it through a pilot system.
Currently, EMMA features primary market documents, such as offering and reoffering statements, as well as trade data. Though the addition of the secondary market component is widely supported throughout the municipal market, at least one NRMSIR - DPC Data Inc. - has said its business would be harmed.
Meanwhile, the SEC voted unanimously to finalize rules to minimize conflicts of interest, boost disclosure, and promote competition among nationally recognized statistical rating organizations, or NRSROs. The rules were first proposed in June after the rating agencies were criticized for assigning triple-A ratings to tainted mortgage-backed securities.
But the SEC yesterday postponed voting on two controversial proposals that would have encouraged NRSROs to use symbols on their structured products to allow investors to better differentiate between structured, corporate, and municipal securities. Another postponed measure would have stripped explicit references from 38 of the SEC's rules, including 2a-7, which governs tax-exempt and other money market funds. The rule generally requires funds to hold debt or with NRSRO ratings of double-A or higher.
Cox said the commission is still awaiting a final recommendation from the trading and markets division on the symbology proposal, and that the NRSRO references proposal "remains a very live issue."
Both measures were criticized by industry groups that warned about their potential harmful effects on the markets. Commenting on the proposal to take NRSRO references out of rules, Vanguard Group Inc., which has over $1 trillion in managed assets, said it is "akin to outlawing seat belts with the hope that drivers will be less likely to be injured if a defective belt fails in a crash."
Still, SEC staff said that they would still like to find a way to limit the so-called moral hazard caused by the commission's seeming endorsement of the ratings.
To tamp down potential conflicts of interest, the SEC passed a rule amendment that prohibits a credit rating agency from rating a security that it or an affiliate helped structure. It also bars NRSRO employees that rate a deal or determine the methodology used to rate a security from negotiating fees for the rating. Finally, the amendment would restrict gifts to NRSRO analysts above $25.
Other amendments that the SEC approved to boost NRSRO disclosures would require firms to provide annual reports that detail the rating upgrades and downgrades broken out over one-, three- and 10-year periods for each asset class that the NRSRO rates.
NRSROs must also include default statistics that show default levels relative to the initial rating and that include defaults that occur after a credit rating is withdrawn. In addition, the rating agencies must also provide details on the amount of verification they perform to assess the assets underlying a structured security, among other things.
The SEC altered an original proposal that would have required NRSROs to keep records of all ratings actions and make them available on their corporate Web sites after a six-month lag period. Instead, it approved a provision that would require NRSROs to make publicly available a random sample of 10% of their issuer-paid ratings and the histories of those ratings for each class of security for which the NRSRO is registered to rate . This provision would only apply to agencies that have issued 500 or more ratings paid for by issuers. The ratings would be required to be made public on the NRSRO's corporate Web site in XBRL format no later than six months after they were assigned.
Sources said that the SEC differentiated between issuer-paid and subscriber-paid models because subscriber-paid NRSROs said they would not be able to make any money if they had to give their ratings away for free.
A separate measure that the SEC put out for public comment yesterday would require NRSROs to disclose the history of 100% of their current issuer-paid ratings in an XBRL format, and asks about the inclusion of subscriber-paid ratings. However, this will have a limited impact on muni bond ratings because 15c2-12 already requires issuers to disclose rating changes in material event notices submitted to NRMSIRs.
Spokespersons for Standard & Poor's and Fitch Ratings expressed support for the SEC's efforts to enhance the reliability, independence, and transparency of credit ratings. A spokesman for Moody's Investors Service said the agency looked forward to reviewing the final rules once they are published in the Federal Register.