WASHINGTON -- The failure to provide secondary-market disclosure has become the Achilles's heel of the municipal bond market.
But now the Municipal Securities Rulemaking Board has taken a small but very important step toward draggin the municipal market into the mainstream of the securities markets. The board has put forward an 18-month pilot system for acepting bond information from trustees and issuers in three different forms: electronically, on paper, and through facsimile.
That should overcome the Securities and Exchange Commission's complaints that the MSRB's previous plan to accept only electronic information would deter some issuers from filing data. Still, it has some flaws.
When it stars up, the system will accept information from trustees only, waiting six months before taking data from issuers as well. It also limits the amount of data that can filed by any trustee or issuer to three pages, a length may make it difficult to file key documents relating to defaults and issuers' finances.
But those are minor drawbacks. The important point is that the proposed pilot plan will get the much-needed secondary-market disclosure system started. Once the system is operating, it can be refined.
David Thompson, chairman of the Public Securities Association's municipal securities division, called the plan a "step in the righ direction," and said "anything is better than where we are now."
But Mr. Thompson, who is the chief financial officer of Griffin, Kubik, Stephens & Thompson Inc., of Chicago, hit the nail on the head when he said he believes secondary-market disclosure "has gone backwards" in the past year as lawyers have advised trustees and issuers not to disclose information upon request because of fear that it could lead to market manipulation and charges of insider trading.
That is exactly why the MSRB system is so important. It will provide the mechanism needed so that trustees and issuers can release information all at once and avoid living in fear they will run afoul of the securities laws.
While the MSRB plan provides the basic means to encourage improved secondary-market disclosure, everyone in the municipal market knows that federal law does not allow the MSRB to dictate the content of that disclosure.
That is up to both the trustees, who generally seem to know what they want to disclose, and issuers, who still collectively have not figured out either what they want or need to disclose.
The MSRB pilot plan should be approved without delay by the SEC and put into operation as quickly as possible. Once the system is in place and is fine-tuned, trustees and issuers will have not have any excuses for failing to provide a vastly improved level of ongoing disclosure.
If they do not, then they will have no one to blame but themselves when the SEC tries to improve disclosure by pushing for costly corporate-style registration of municipal bonds.
