Plan is under way to boost disclosure for muni bonds

With criticism mounting about the lack of disclosure in the municipal bond market, the agency that oversees the sale of muni 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 how broker-dealers should communicate with clients online. In that guidance, the board will also make it clear to broker-dealers that it is their responsibility to keep abreast of financial disclosures made by issuers online and to pass that information along 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,” said Ernesto Lanza, general counsel to the MSRB. “Who should the onus fall on? We think the answer is the broker-dealer, not the investor,” Mr. Lanza said.

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In addition, the MSRB will launch an electronic venue where muni bond issuers can post information about upcoming offerings before they file a prospectus, Mr. Lanza said. The MSRB has no regulatory authority over muni bond issuers. But it thinks that these two initiatives should make it easier for issuers to disclose financial information. The moves come as investors are fleeing muni bonds because of fears of widespread defaults. In December, Meredith Whitney, a bank analyst who predicted the credit market crash, forecast 50 to 100 “significant muni bond defaults” this year. Muni bond funds have seen $27.4 in billion in outflows over the past 16 weeks, representing 8% of assets under management, according to Lipper FMI. Last May, the Securities and Exchange Commission launched an investigation of the muni bond market, with an eye toward improving transparency. The SEC has brought a case against the state of New Jersey for allegedly failing to disclose its pension obligations to investors and 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 priority, Mr. Lanza said. Since the MSRB initially published its guidance in 1998, it has created a central electronic venue for all muni bond issuers to post their prospectuses and any additional information. Anytime a muni bond issuer has updates, it can post them 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. Also, digital communications have evolved quite a bit since 1998, and the MSRB wants to be clear about what is expected of brokers, he 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,” Mr. Lanza said. The MSRB doesn't have a set timetable for when the new guidelines will come out. By May, however, muni 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 muni 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. The database will be of particular use to smaller retail brokers, he said. Those brokers often go to several different places to get information on upcoming bond issues. Although the MSRB initiatives will boost disclosure, Mr. Cervantes warned that they won't solve the larger problem that plague tax-exempt issuance. He said that many municipalities simply don't have the resources to provide timely disclosures on their muni 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 muni bond issuers, making it easier for them to provide information is all that 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. E-mail Jessica Toonkel at jtoonkel@investmentnews.com.