Expect a head-spinning 10 years of changes in securities regulation, municipals experts say.
In fact, you may not have to wait that long. "It will be a very different landscape five years from now," said Robert Lamb, a professor at New York University's Stern School of Business in Manhattan and an adviser to a number of municipal bond issuers.
The last six months alone have seen a dizzying number of initiatives targeting political contributions by dealers and other market participants, dissemination of bond prices, primary and secondary market disclosure, the quality and diversity of securities held by tax-exempt money market funds, and education of broker-dealers.
New rules are likely that would require dealers to state on confirmations whether bonds are rated and to give dealers' price markups on riskless principal transactions. Also, the Securities and Exchange Commission is expected to continue to press the market to reduce its use of negotiated underwritings and to drastically cut back oil the number of participants in bond syndicates that are chosen by issuers. The SEC also is likely to push for formal regulation of the agencies that rate municipal bonds.
Implementing these standards is expected to keep the Municipal Securities Rulemaking Board and the SEC busy for the next several years. After that, another round of changes is likely.
For example, regulators will be accelerating the clearance and settlement of municipal bond trades and focusing on outdated accounting rules for tax-exempts.
All this will happen while technology keeps changing. The MSRB will soon launch a pilot program for disseminating municipal bond prices to the market. Members of the SEC have asked the board to upgrade the pilot so that it will make prices available to investors on the same day they become known. Commissioners are urging the board to look at software that the National Association of Securities Dealers is using for its Fixed Income Pricing System for junk bonds, which permits same-day reporting.
Also, the MSRB's Municipal Securities Information Library, which has had little participation to date, could pick up steam as it seeks to expand to take in annual reports, audited financial reports, and longer documents. And private vendors will offer products that repackage for the market the raw data collected by the board's library.
All in all, bond regulation may have reached a decisive point in its history. "I think we're going through a critical time," said Richard Ciccarone, senior vice president and director of tax-exempt fixed-income research al Kemper Securities Inc. in Chicago. "We are going through structural changes in our municipal regulatory environment."
"There's a momentum now to get change," said W. Bartley Hildreth, a professor of public administration at Louisiana State University, in Baton Rouge. "I think we are going to be moving more to the corporate model. The die is really cast. The creative burden on issuers is to get that change to be tempered and to [steer it so] it's somewhat helpful and not hurtful."
Secondary Disclosure to Lead the Way
No area is expected to see more change than secondary market disclosure. This fall the SEC gave market participants a January deadline for coming up with a plan to improve ongoing disclosure, and two days ago a dozen groups proposed such a plan in a letter sent to the commission. But some market watchers say major changes are on the horizon with or without regulators.
"I'm looking for a decade of major improvements in disclosure," Ciccarone said. "Nobody was writing about disclosure in 1987. Now it's in the papers all the time. It's been exponential. We are on a path for change."
Change is inevitable because the market is attracting a different kind of investor, said Richard Lehmann, president of the Bond Investors Association. "There is going to be a more pressing need for a more active and vibrant secondary market since individuals are not going to be a strong buy-and-hold," he said. "That pressing need is going to bring as much change as government regulators pushing in front."
Whether that will be enough change is another question. "Unfortunately, regulators are trying to promulgate legislation and rules on a very strong buyer's market," Lehmann said. "And unfortunately, that atmosphere doesn't lend itself to serious consideration of reforms. Everyone can point to the market and say the market is great. Why tamper with it?"
But over the next five years, he said, something is bound to go wrong, and then the market will be caught off balance. "They are going to find that the secondary market and mechanism [for disclosure] is not adequate to handle a major shift in direction of investors suddenly who are are net sellers rather than buyers," Lehmann said.
Jeffrey Green, general counsel of the Port Authority of New York and New Jersey, said, "People who don't have adequate disclosure will be selling bonds to people much more sophisticated and willing to take a risk. Today, good issuers are paying a penalty for had issuer. It's a backward situation."
NYU's Lamb said: "The availability of secondary market disclosure is horrendous, and must be improved. Everyone knows this will be a huge problem that needs to be remedied. I believe it will be forced to improve by new regulations that require tremendous upgrading of dissemination of information by holding dealers' feet to the fire."
"The primary issue before this market is secondary market disclosure," said Christopher Taylor, executive director of the MSRB. "In order to trade securities, a dealer is going to have to be able to press a button. I fully expect all issuers will be providing that information in one shape or form. They will not be able to come to market at a reasonable cost without that information being available."
Ciccarone said that MSIL, the MSRB's electronic library, will provide the raw data, and competing services will distribute it to the public. "It's already starting to work that way," he said. "Electronic information systems are growing like wildfire."
Robert Doty, president of American Government Financial Services, predicted "a system where issuers send information easily and readily to at least one central source, maybe two or three. And there will be all sorts of services developed to provide summaries of that information and statistical data. Entire documents will be available quickly through computer."
Won't Be Far Behind
Lehmann said better price dissemination will come without a lot of "prodding" from regulators because the underwriting community sees the improvement as good for business. "Price dissemination is clearly one area where they see their vested interests at stake. Disclosure is more complicated."
Hildreth, the Louisiana State professor, said, "I think we will see studies that will start showing some pricing distinction. We've got a new cadre of researchers in municipal securities that are starting to explore the topic. I think it"s just it matter of a couple of years."
Hildreth sees a new attitude on the part of the SEC. "We have never seen an SEC that appears to have municipal bonds at the tip of its tongue so frequently," he said. "That's going to drive researchers."
Kenneth Willmann, vice president of investments at USAA in San Antonio, predicted "a gradual movement to some sort of centralized [price] quotation system much like the NASDAQ over-the-counter stock system."
Lamb called price dissemination "abysmal," but said "it will be increasingly improved by on-line, on-screen" systems. "Today you can call up 10 brokers and get 10 prices with a very wide dispersion that is just huge by comparison with other markets."
Ciccarone also puts his faith in computers. "Computers are making it possible to show in a data base a daily listing of prices based on real trades," he said. "I don't think it will come in The Wall Street Journal so much, although the Journal may add more listings. But it will be commonly in the form of electronic databases."
Real-time reporting is likely, Ciccarone said. "Ten years from now you will see reporting similar to corporate bonds. It's within the realm of possibility that tickets could be electronically recorded in central data bases as they are written to show trades happening all over the country. It may be 20 years before there is instant reporting. But it will happen."
Conduit Bonds Likely
To Remain in Spotlight
One issue that will probably keep on being debated is whether conduit bonds should be registered with the SEC, experts said. Rep. Edward J. Markey, D-Mass., chairman of the House Energy and Commerce Committee's subcommittee on telecommunications and finance, has signaled that he may, introduce legislation that would require registration.
"That's where the bad apples have been," Hildreth said. "That's what's bringing a lot of attention to the marker. We've done it to ourselves as issuers. I think we will see some further tightening. It may be redefined in some historical way."
Willman said, "I can see industrial development bonds being considered [like] corporate bonds."
Ciccarone warned that the industry should not wash its hands of conduits. "We will be sorry down the road," he said. "If we disown them, it makes it easier for Congress to say they are taxable securities when they are looking for additional revenue."
Ciccarone said the rapid growth of mutual funds will bring broader oversight of bond issuers. "Oversight will be critical. Price changes could occur from day to day. You have to be on top of the credit.
"It will start with annual reporting," he said. "More frequent reporting will depend on the demands of funds. We may even see the day that it becomes preferred status as to who is providing quarterly reporting for larger credits. Now most analysts would be satisfied if they could get annuals." He said, however, that some buyers of lower-rated health care bonds are already mandating reports on a quarterly or even monthly basis.