WASHINGTON - Municipal bond analysts say they are frustrated by the low levels of secondary market disclosure and that it may be time for regulators to step in with new standards.
Roughly 79% of the analysts polled in a new survey sponsored by the National Federation of Municipal Analysts said they would support action to enhance disclosure by the Securities and Exchange Commission or the Municipal Securities Rulemaking Board.
Three-quarters of the analysts polled in one part of the survey support issuers being required to provide quarterly or annual reports to the marketplace.
But a majority of analysts opposed regulating municipals to the degree that corporate securities are currently regulated. Corporate securities must be registered with the SEC, and the agency sets out detailed standards for the content of the quarterly and annual reports by corporate issuers.
The unrest among analysts comes as Congress gears up for hearings early next year on the municipal bond market. Lawmakers hope the hearings will determine whether legislation is needed to force improvements in disclosure, according to government sources.
The MSRB, meanwhile, is on schedule to launch its pilot secondary market disclosure system next month. Late this week, the group plans to send letters to bank trustees formally inviting them to come on board with the 18-month pilot, which will accept three-page disclosure announcements on paper or electronically from banks the first six months. It will then open the pilot to the rest of the market.
Under Section 15B(d) of the Securities Exchange Act, the so-called Tower Amendment, the SEC and the MSRB are prohibited from requiring issuers to register their offerings. But the provision does not prevent the SEC from requiring disclosure about an issuer's finances.
"We would obviously prefer to see the industry move on its own towards a policy of more complete disclosure," said Vicki Westall, chairwoman of the National Federation of Municipal Analysts and director for municipal research at Edward D. Jones & Co. in St. Louis. "We believe that the market itself provides an incentive to do so in the form of increased interest costs for those issuers who don't provide timely secondary market disclossure."
About 65% of the institutional analysts responding to the survey said they almost always or frequently require additional yield from issuers when concerned that secondary market information will not be available, according to the results.
"It 's clear from the survey that the lack of disclosure in some areas of the bond market is no longer just an inconvenience for the analytical community," Westall said. "The market is recognizing that this information has value, which implies an element of materiality. Issuers are being penalized for a failure to provide periodic disclosure information."
According to the survey, which was filled out by 195 of the group's 750 members, not all sectors within the municipal market have secondary market reporting and disclosure problems.
The best sectors, in the order they were ranked in the survey, were state governments, public power, and local government general obligations. The worst sectors were local housing special districts and health care.
Ninety-four percent of the analysts surveyed supported a controversial federation proposal that issuers say in the introduction to the official statement whether or not the issuer or its agency intends to provide secondary market disclosure. About 79% said that they seldom almost never see this kind of disclosure.
Of the 195 analysts who responded to the survey, 46.7% represented institutional investors, 19.8% dealers and underwriters, 12.3% credit enhancers, 8% financial advisers, 7.1% rating agencies, and 6.1% other entities.
Analysts were also asked to rate the timeliness with which they receive disclosure documents. Roughly 47% said the timeliness of receiving preliminary official statements for competitive sales was excellent or very good, while 52% said it was not very good or poor.
About 50% gave a high rating to the availability of preliminary official statements before negotiated sales, while the other 50% said it was not very good or poor. About 26% said the timeliness of final official statements was excellent or very good, while about 75% said it was not very good or poor.
Only about 2% rated as excellent or very good their receipt of financial audits after the close of the fiscal year, while 90% rated it not very good or poor.
In addition, about 63% of survey respondents said issuers are not doing enough to highlight material changes between preliminary and final versions of the official statement.
About 66.7% were dissatisfied with disclosure about "potential taxability of annual appropriate securities that are insured in the event the insurer must pay claims on a terminated lease."
Also cited as a problem by 62% of those responding was reporting by issuers of hazard and earthquake insurance risk.
