The SEC and MSRB are working to make it easier for retail investors to get access to ongoing disclosure concerning municipal bonds. The regulators, in unveiling a new regulation and a new database hope to eliminate the unfair advantage that institutional investors have had for years in the muni-bond world.
Currently, if a retail investor wants to obtain disclosure documents about a municipal bond offering, they must request it from specialized firms that maintain it. The problem is that those firms are slow and expensive for investors. So the SEC, along with the MSRB, is establishing a centralized location that investors can access for free.
The SEC has no direct authority over municipal bond issuers. And while it can mandate that corporate issuers must provide quarterly disclosure, the same is not true on the municipal side.
In 1995, the SEC ruled that a broker-dealer could not underwrite any municipal security unless the issuer submits ongoing information about the offering. The regulator then gave status to four firms known as Nationally Recognized Municipal Information Security Repositories or NRMSIRs who would collect the data and store it.
The problem was that NRMSIRs charge about $25 for each individual search. If a retail investor wants quarterly updates on a number of different bonds, it could cost them several hundred dollars a year.
To fix the problem, the MSRB launched a database last spring called the Electronic Municipal Market Access (EMMA) system to house trading data and the bond’s official statement, which is the prospectus. Last month, the SEC approved a rule proposal that would make the EMMA system the primary location for all investors who want to learn about a given muni bond.
“The fundamental bedrock of all American trading is that all disclosures are available to all investors,” said Anne Phillip Ogilby, an attorney with the law firm of Ropes & Gray. “You don’t want just the fat cats having access to all the information.”
According to the MSRB, there is approximately $2.65 trillion in assets in municipal offerings, and two-thirds of the investors are retail.
“We wanted to make sure information goes to the majority of the investing public,” said Lynnette Hotchkiss, executive director at the MSRB. “A firm like Fidelity should get the information at the same time as Joe Investor.”
In addition to the high costs of requesting documents, the NRMSIRs, in general, have several problems. First off, they are all paper-based, which means retrieving documents is a slow process, Ogilby said.
There is also no standardization of the documents either. So, of the four national NRMSIRs, it’s possible only two might receive a specific document. The facilities lack a proper indexing system, so some documents are not in the proper place, which makes it difficult to determine who has what. And with each search resulting in a charge, a retail investor could potentially pay hundreds of dollars just to find one official statement.
“There was a sense that the ongoing system wasn’t working as well as it could have and a controlled location was needed,” said Walter St. Onge, an attorney with Edwards Angell Palmer & Dodge. “Having a place to file information and access information on a standardized basis makes it much easier for everyone in the industry.”
EMMA launched in March and so far holds a bond’s official statement and its trading data, Hotchkiss said. Since then, the database has had a significant amount of web traffic. Between March 31 and July 31, EMMA has averaged 150,000 page views per day and 700 different visitors per day, according to the MSRB.
If the rule passes, NRMSIRs will lose a substantial portion of their business. Although most agree it will not adversely affect firms like Bloomberg and Standard & Poor’s. But DPC DATA, could be a different story.
When the MSRB first launched EMMA, DPC commented that the database could be harmful to its business. Peter Schmitt, chairman and CEO of DPC, referred comment about the recent proposal to a spokesperson who then declined to comment. She did say that the firm would be submitting a comment letter to the SEC.
Despite DPC’s potential reservations about EMMA’s expansion, many believe there will not be a significant amount of opposition and the SEC will easily approve it. The MSRB has already begun talking to issuers and preparing education tools to show them how to work the EMMA system.
Hotchkiss said the goal, pending approval from the SEC, is to have EMMA system up and running with ongoing disclosure by Jan. 1, 2009.
