ICI Seeks Improvements to Muni Bond Disclosure
'Information Is Key' in Current Climate
February 9, 2009
The Investment Company Institute is pushing for improvements to municipal disclosure, which it generally considers limited, non-standardized and stale.
The group believes the improvements are especially needed now that so few bonds are being insured and it would even like to see lawmakers repeal the so-called Tower Amendment, which blocks regulators from requiring municipal bond issuers to file documents with them before selling bonds. But the ICI realizes that there is little support for this in Congress at the present time.
"We're really trying to push the disclosure agenda," said ICI General Counsel Karrie McMillan in an interview. "The main reason, as we've all learned, particularly in these markets, is that information is key, but the information available for municipal issuers is lacking compared to what's available for virtually every other public issuer."
McMillan said the ICI is not necessarily seeking the same types of disclosures required of corporate issuers and borrowers, "because we are conscious of the cost to municipal issuers. But we think that there can be a [regulatory] regime tailored to their businesses and to the things that most affect their market that their investors would want to know about," she said.
Specifically, the ICI would like the Securities and Exchange Commission to use its existing regulatory authority to update its Rule 15c2-12 on disclosure in a way that will ensure more timely or more frequent filings from municipal bond issuers.
Under the rule, dealers cannot underwrite most muni securities unless issuers have agreed in writing to file annual financial and operating information and notices of 11 types of material events with nationally recognized municipal securities information repositories, or NRMSIRs. The ICI would like the SEC to modify the material events list, which has not been updated since the rule was adopted in 1994, to more fully reflect the types of events that are material today.
The group would like to add to the list changes in the issuer's senior management or accountants as well as pending or threatened "material" litigation or regulatory action and the failure to meet any financial covenants contained in the bond documents, especially requirements to make monthly or quarterly payments, among other things.
The ICI would also like the SEC to address the speed with which disclosures are made, possibly by requiring underwriters to obtain and release annual financial and operating data more frequently-no later than three months after the end of their fiscal years.
Buy-side market participants like the ICI have long complained about the staleness of municipal disclosures, noting that even though issuers must file financial information once a year, the filings are often made 180 to 270 days after the end of the fiscal year.
The ICI believes that the disclosure problems in the market are largely tied to the Tower Amendment, which in 1975 was added to the Securities Exchange Act of 1934 and restricts the Municipal Securities Rulemaking Board and the SEC from directly or indirectly requiring muni issuers to file documents with them before securities are sold.
"As sophisticated institutional investors, we see what's available elsewhere and wonder why this is the one pocket of the universe to be carved out," McMillan said.
Though the ICI believes Tower should be repealed, McMillan conceded that this is unlikely to happen "overnight."
Issuer officials remain strongly opposed to any changes, and top lawmakers, among them House Financial Services Committee Chairman Barney Frank (D-Mass.), have suggested they would not support repealing or altering Tower because it would be unduly burdensome to state and local governments.
The MSRB's EMMA system, which will replace the NRMSIRs and serve as a centralized disclosure site for the market starting this summer, is "a benefit" to the market, but the need for additional disclosure rules continues to grow for a number of reasons, including because of the downgrades to monoline bond insurers over the past year, McMillan said.
"In this industry, you used to not have to worry about the disclosures quite as much because the issuers were insured by the monoline insurers, so you had this extra layer," she said. "Without that insurance, which people don't think is going to come back, or if it does it will take a while before there's trust in it, it's one more reason why disclosure is important."
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