Plan under way to up muni bond disclosure — but will it help?

With criticism mounting about the lack of disclosure in the municipal bond market, the agency that oversees the sale of municipal securities is working on initiatives designed to encourage broker-dealers and issuers to provide more information to investors. In the next few months, the Municipal Securities Rulemaking Board plans to introduce guidance on electronic disclosure activities for broker-dealers. Separately, the MSRB will launch an electronic venue where municipal bond issuers can post information about upcoming offerings before they file the prospectus, said Ernesto Lanza, general counsel. The MSRB has no regulatory authority over municipal bond issuers. But the board believes that these two initiatives should make it easier for issuers to disclose information. The MSRB also hopes the planned posting site will make it clear that broker-dealers are responsible for being aware of all the online information about bond issues — and to disclose that information to investors. “We want to help ensure that to the extent that the information is available, it's being used and it's being used properly,” Mr. Lanza said. “Who should the onus fall on? We think the answer is the broker-dealer, not the investor.” The MSRB's plans come in the midst of a mass exodus of investors from muni bonds over fears of widespread defaults. In December, Meredith Whitney, the bank analyst who predicted the credit market crash, forecast 50 to 100 “significant muni bond defaults this year. As of Feb 23, municipal bond funds had seen $26.4 billion in net outflows over the past 15 weeks, due largely to fears about mass defaults in the muni bond market, according to Lipper FMI. Last May, the Securities and Exchange Commission launched an investigation of the municipal bond market designed to increase transparency. The agency has brought a case against the state of New Jersey for allegedly failing to disclose its pension obligations to investors. The commission is looking into similar issues in Illinois. The MSRB has been discussing updating its guidance to brokers on electronic communications for some time, but the recent events in the market have made the project a bigger priority, Mr. Lanza said. Since the agency initially published its guidance in 1998, it has created a central electronic venue for all municipal bond issuers to post their prospectuses and any additional information. Anytime a municipal bond issuer has updates, it can post it to this venue, known as Electronic Municipal Market Access, or EMMA. “We want to make it clear that broker-dealers are obligated to be aware of what's in that central disclosure system,” Mr. Lanza said. But digital communications have evolved quite a bit since 1998, and the MSRB wants to be clear about what is expected of brokers, Mr. Lanza said. For example, social networking is a relatively new phenomenon and will be something that the MSRB will examine. “Whether a broker is recommending something over the phone or on their Facebook page, it has to be regulated the same way,” he said. The agency doesn't have a set timetable for when the new guidelines will come out. By May, however, municipal bond issuers will be able to post preliminary prospectuses to EMMA. Currently, regulators have no authority to require an issuer to disclose information before a bond sale. By providing this venue, however, the MSRB hopes that more municipalities will do so, Mr. Lanza said. Having preliminary prospectuses in a central location will help municipal bond brokers, said James Cervantes, chairman of the California Public Securities Association, a municipal bond industry lobbyist, and managing director at bond underwriter Stone & Youngberg LLC. He added that the database will be of particular use to smaller retail brokers. Those brokers often go to several different places to get information on upcoming bond issues. While the MSRB initiatives will boost disclosure, Mr. Cervantes warned that they won't solve the larger problem plaguing tax-exempt issuance. He pointed out that many of the municipalities simply don't have the resources to provide timely disclosures on their municipal bond offerings. “The economic crisis has forced retrenchment in a lot of communities and many municipalities don't have the staff they did three years ago,” Mr. Cervantes said. “So on one hand you have demand for more timely information, but on the other hand you have reduced capability to do that. And that's a real challenge.” Without the authority to regulate municipal bond issuers, making it easier for them to provide information is all the MSRB can do at this time, Mr. Lanza said. “All we can do is try to make it as easy for the issuers as possible,” he said.