WASHINGTON - The Securities and Exchange Commission should not impose additional disclosure requirements on issuers or dealers without fixing the repository system, which the SEC's own study shows is not working, The Bond Market Association plans to tell market groups at a Muni Council meeting to be held here next week.
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TBMA is expected to detail its position and the initiatives it has undertaken in this area at the council meeting, which is to be hosted by the Investment Company Institute at its offices here on March 14 and 15. The council is made up of about 20 municipal market groups and is holding a series of meetings to try to reach consensus on how to improve secondary market disclosure in the municipal market.
ICI counsel Amy B. R. Lancellotta and Barry Simmons yesterday outlined the proposed agenda for the meeting, which is expected to include presentations from all four of the nationally recognized municipal securities information repositories, as well as the Municipal Advisory Council of Texas and Digital Assurance Certification, an Ernst & Young affiliate that provides dissemination services for municipal issuers.
Martha Mahan Haines, chief of the SEC's Office of Municipal Securities, also is scheduled to speak. Municipal Securities Rulemaking Board officials are expected to attend the meeting, but are not scheduled to give any presentations.
In the paper it prepared for the meeting, TBMA said, "We agree with Ben Watkins that the repository-based collection and dissemination system must be fixed before we request issuers to provide more and timelier disclosure." Watkins, Florida's bond finance director, said last week that the SEC should focus on fixing the secondary market disclosure system it created before pressing issuers to improve their disclosure practices.
In addition, TBMA said that because the municipal market is regulated primarily through the dealer community and some of the SEC's and MSRB's rules force dealers to rely on the repositories, the regulators must make sure that compliance with the rules is not difficult or impossible to achieve.
As an example, TBMA cited the MSRB's recent interpretation of its Rule G-17 on fair dealing, which requires dealers to check with "established industry sources" such as the NRMSIRs for information before executing a municipal securities trade with a customer. "The current NRMSIR system, which relies on four separate and distinct repositories -- each containing different information -- makes it difficult to transact business in a timely and cost-efficient manner," TBMA said. "Preliminary results from the SEC's NRMSIR study confirm that the current system does not work."
In a recent informal study of 30 randomly chosen but diverse municipal securities issues, the SEC found that the NRMSIRs possessed only 57% to 75% of the disclosure documents that the issuers were supposed to have filed with them. The commission is trying to determine if the low percentages were due to issuer noncompliance or NRMSIR filing errors.
TBMA said also that the current repository system "discriminates against the retail investor, the one party in need of the most protection," because the retail investor does not know NRMSIRs exist or have access to them.
The municipal market has "a golden opportunity to create a municipal disclosure system that really works," particularly because of the advancements in technology that have occurred since the NRMSIR system was created, TBMA said.
The paper detailed several ongoing TBMA initiatives in the municipal market. These include: encouraging electronic disclosure and the use of standardized cover sheets for issuers' disclosure documents; developing "protocols" to facilitate electronic communications; making MSRB trade data publicly available and historically searchable; developing a uniform descriptive database for fixed income securities; and working with the Internal Revenue Service to provide the market more information on its municipal securities enforcement program.
TBMA officials are expected to speak to the Muni Council group, along with representatives of the National Association of Bond Lawyers, the afternoon of Thursday, March 14, just before Haines speaks.
Lancellotta and Simmons said they are optimistic that the meeting will advance the disclosure discussions, but that it will probably not produce any major immediate results. "To keep all of the groups talking and all of the ideas floating is helpful," said Lancellotta. "We are hopeful that we will see some progress. It's going to take some time to reach the ideal disclosure system, but every little improvement is really helpful."
"To put it in baseball terms, we don't expect to hit a homerun with this meeting, but a series of base hits can do a lot," Simmons said.
The meeting is to start Thursday morning with a panel of representatives from the buy side, including possibly officials from the ICI, National Federation of Municipal Analysts, Investment Counsel Association of America, and the Association for Investment Management & Research. These groups are expected to detail their regulatory and other needs for good disclosure information. The ICI has called for the SEC to consider revising its Rule 15c2-12 on disclosure to eliminate the exemptions for short-term and variable rate demand obligations that roll over on a long-term basis and to expand the list of material events that issuers have to immediately disclose.
A panel discussion will follow on the need for issuers to attach nine-digit Cusip numbers to their disclosure documents to clarify which bond issues are covered by the documents. Representatives from the American Bankers Association's corporate trust committee and Standard & Poor's Cusip bureau are expected to sit on that panel.
That afternoon, Robert Doty, the president of American Governmental Financial Services Co., an independent financial advisory firm, will lead a discussion on the role and makeup of the Muni Council.
On Friday, the NRMSIRs, Texas Mac, and DAC will make presentations. The ICI sent the groups an informal survey that focuses on their operations and could form the basis for discussions resulting from that panel.
