Regulator weighs muni transparency issues

A municipal bond regulator will seek comment on whether banks and securities firms should reveal more information on bidding for auction-rate bonds. The Municipal Securities Rulemaking Board, the primary muni bond regulator, will consider a notice within the next two to four weeks, seeking industry comment on what metrics should be used to increase transparency, according to Lynette Hotchkiss, executive director of the MSRB. This group has been working with the Securities and Exchange Commission to enhance disclosures on the auction process. Currently, investors only have access to the price of the bonds. “We’ll be looking at clearing rates, reset rates, and other kinds of information that might be helpful to the investors and issuers,” said Ms. Hotchkiss. These bonds are long-term debt securities with an interest rate that can reset every seven, 28, or 35 days. The bids banks and securities firms submit determine the reset interest rates. The action follows a series of recent bond auction failures, in which the banks and dealers which are underwriting the sales have stepped back from purchasing the debt after bidders shied away from buying the securities. UBS AG and Merrill Lynch and Co., along with other juggernaut banks, have pulled away from auction-rate muni bonds that don’t bring in enough bidders, insiders told Bloomberg. “The banks’ stresses on their balance sheets are backstopping the auctions,” said John Pomeroy, senior vice president and portfolio manager of the municipal bond department at Franklin Templeton. “When we run into cycles of stress, the markets react. Weak credits will see their spreads widen.”