SEC proposes stricter muncipal bond disclosure

July 15, 2009

By Lisa Lambert and Rachelle Younglai
WASHINGTON, July 15 (Reuters) – Municipal bond issuers must disclose more information about events such as bankruptcies on a timely basis so that investors who buy debt from states and counties will be able to better monitor their investments, securities regulators proposed on Wednesday.
The Securities and Exchange Commission voted to increase disclosures in the $2.6 trillion municipal bond market and proposed issuers disclose information about material events within 10 days.
Federal rules now only require disclosure of material information “in a timely manner.”
SEC Chairman Mary Schapiro said a vast amount of information is available to corporate securities investors compared to what is available to investors in municipal securities.
“The disparity is all the more concerning because of the significant retail (investor) participation in the municipal securities markets,” Schapiro said at an open meeting.
But even with tougher disclosure requirements, Schapiro and the SEC’s two Democratic commissioners said more had to be done to strengthen supervision of the municipal bond market.
Federal law prohibits the SEC from directly regulating municipal bond issuers. But the SEC indirectly supervises them through broker-dealers. Under its rules, broker-dealers cannot underwrite municipal bonds unless the issuer has contractually agreed to file disclosures of material events.
Under the SEC’s proposal, issuers would be required to disclose information such as rating changes and failure to pay principal and interest regardless of whether it was deemed to be material. The current rule only requires disclosure if the event is considered material.
The SEC also proposes to expand its list of events to include tender offers, mergers consolidations, acquisitions and appointment of a successor or additional trustee.
Timing is slow for disclosures in the municipal bond market, and buyers often do not have all information about the debt they buy. A study released by DPC Data, a company that sells muni data, found 667 dealer-to-customer sales with prices at par or higher happened after the bonds’ issuers had filed default or other distress notices. In half of the sales the issuers had filed no financial statements during 2007 or 2008.
Also on Wednesday, the SEC proposed expanding disclosure rules to cover other municipal securities known as variable rate demand obligations, which have long maturities but coupon rates that are reset periodically.
Investors who cannot sell their debt put the securities to a bank or other third-party liquidity provider, which has a contract to purchase them at par. The SEC would like to make public information about those providers and the facilities, such as letters of credit, used for the obligations.
Recently, there has been a shortage of liquidity facilities, as banks have exited the market, hurting the bonds’ credit ratings. According to ThomsonReuters data released on Wednesday, there was 65 percent less debt backed by letters of credit in the first quarter of 2009 than in the first quarter of 2008.

Action on the proposals could happen soon. The Municipal Securities Rulemaking Board has already taken the first steps in implementing them by filing a request with the SEC to have issuers disseminate presale disclosures on its EMMA Website.
It is also seeking to include more information about new issues on EMMA so investors will know when to expect future disclosures such as annual financial statements.
The board, made up of industry participants, writes the rules the SEC enforces and also provides the free Electronic Municipal Marketplace Access site as a centralized disclosure clearinghouse. EMMA has been operating for more than a year and this month began carrying continuing disclosures. (Additional reporting by Karen Pierog in Chicago; Editing by James Dalgleish)

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