The recently issued SEC proposal to expand issuer disclosure in the $2.7 trillion municipal-securities market doesn't go far enough, say muni-bond analysts and the mutual fund industry.
Although the Securities and Exchange Commission would extend its disclosure rules to variable-rate bonds and improve disclosure of tax risks faced by tax-free issuers, the National Federation of Municipal Analysts iand the Investment Company Institute want more.
“We're very happy with what the SEC proposed, but we feel it's just a first step,” said Lisa Good, executive director of the Pittsburgh-based NFMA.
The NFMA wants muni issuers to be required to disclose more operating data and projections, as well as the terms and counterparties of interest-rate swaps and liquidity agreements.
The Washington-based ICI, the mutual fund industry's trade group, wants Congress to give the SEC even more power to regulate muni issuers. In particular, it wants to see muni issuers file disclosure documents before securities are sold.
Under current law, federal securities regulators can't force muni issuers to make disclosures. Instead, the SEC requires bond underwriters to ensure that issuers agree to make disclosures.
“As a result, existing disclosures are limited, non-standardized and often stale,” ICI president Paul Schott Stevens said in testimony before the House Financial Services Committee on July 17, after the SEC put out its proposal.
ICI spokeswoman Ianthe Zabel declined to comment further.
In addition to extending disclosure requirements, the SEC proposal would also expand the list of disclosable material events to include tender offers and stress events such as bankruptcies, insolvencies and receiverships.
And for the first time, muni issuers would have a deadline of 10 business days for making event disclosures. Under current rules, issuers are simply required to make disclosures “in a timely manner.”
The wider range of possible disclosures could be a burden on issuers, said Steven Apfelbacher, president of the Montgomery, Ill.-based National Association of Independent Public Finance Advisors and president of Ehlers & Associates Inc. in Roseville, Minn.
“I think [the SEC is] under pressure to provide additional information,” he said. “But the problem with [regulating the] tax-exempt market is that it's so diverse.”
Mr. Apfelbacher argued that additional disclosure information may be more appropriate for riskier bonds such as revenue or conduit bonds, which rely on revenue from specific projects or from tax-exempt private entities to repay bondholders.
Expanding disclosure obligations to variable-rate muni bonds, known as variable rate demand obligations, or VRDOs, is an important step because many of these securities are held by tax-free money market funds, observers said.
At the time muni-disclosure rules were adopted in 1989, variable-rate bonds were a relatively small part of the market. Back then, new VRDO issues raised about $13 billion, but by last year sales had reached about $115 billion, the SEC said.
“If you own a security in a money market fund, an [adverse event] will not only impact the price, but also put you out of business by breaking the buck,” said Mark Stockwell, vice chairman of the NFMA board and director of muni research at PNC Capital Advisors in Philadelphia.
Money market funds are re-quired to determine credit risk for every security that they buy, “so it's imperative to get as much information as possible,” he said.
But secondary-market disclosure information for VRDOs may be difficult to get unless the issuer provides that information for its fixed-rate securities, which are covered by disclosure rules, Mr. Stockwell said.
A downgrade or other credit event can terminate the put features of VRDOs, which makes the security ineligible for money market funds, he said. But because VRDOs aren't now subject to disclosure rules, market participants won't always get that information, Mr. Stockwell said.
IRS INQUIRIES
The SEC proposal would also require more disclosure of pending Internal Revenue Service inquiries into the tax status of tax-exempt securities.
The NFMA's Ms. Good said muni issuers worry about the impact of disclosing what might be a routine IRS inquiry, “but as those types of disclosures become more commonplace, I don't think it will be big deal.”
In the past several years, the IRS has intensified its focus on the tax-free bond market, she added.
The proposed rule would affect only primary offerings of bonds brought to market after the effective date of the changes.
At press time, the proposal was set to be published in the Federal Register, at which time a 45-day public comment process starts. The SEC would then have to vote on final approval.
E-mail Dan Jamieson at [email protected].
