WASHINGTON -- The Securities and Exchange Commission yesterday approved the Municipal Securities Rulemaking Board's proposed electronic disclosure library for official statements but, in a surprise move, deferred action on the MSRB's plan to set up an electronic system to dispense secondary-market information.
In a major setback for the MSRB, the commission voted 4 to 0 to table the board's proposed Continuing Disclosure Information/Electronic Submission system until the board develops a new plan that gives issuers and trustees the option of submitting information to the secondary market system on paper.
Currently, the board's proposal would only allow trustees and issuers to file notices, financial statements, and other documents electronically. But SEC commissioners worried the procedure would be too complex and would discourage participation in the system.
Yesterday's vote clears the way for the MSRB to set up that portion of its Municipal Securities Information Library that will collect official statements on paper and transfer the documents to computerized disks using "imaging" technology. The disks are expected to be purchased largely by information vendors that can repackage the data for sale to the market.
But the commission's vote to defer action on the secondary-market system will seriously delay the MSRB, which had hoped to have its voluntary secondary-market system operating within six months.
The MSRB now cannot start its secondary-market system until it sends an amended proposal to the SEC that would provide for both paper and electronic submission of notices and documents. The SEC would have to open the proposal for comment -- 21 days is the standard comment period -- and take a vote on the plan.
The MSRB also will have to revamp its plan after examining such issues as how it will collect voluntary paper submissions of secondary market data, where it will store the material, how much staff will be needed to convert information into electronic form for dissemination to the market, and whether its revamped system will be cost effective.
MSRB Executive Director Christopher Taylor, in an interview yesterday afternoon, was unable to say whether the board will make another proposal to the SEC. Whatever the board might propose would have to be a "major filing," he said, adding that he could not say whether such a filing could be made this year. He said such a filing would be a "bigger job" than the extensive submittal it made last year for the two-part MSIL system.
"A continuing disclosure information system, with paper submissions from issuers and their agents, is an enourmous undertaking in comparison to" the systems for the electronic secondary market and collecting official statements, said MSRB Chairman David Hartley in a statement following the three-hour SEC meeting.
"The board must ensure that any such system provides timely availability and dissemination capability to all users of the information on a cost-effective basis. In addition, there is a huge volume and diversity of such documents which result in complicated indexing questions," he said, noting that the board will discuss the matter at its next meeting in July and will continue discussing it with the SEC.
Mr. Hartley said the board is pleased both that the SEC approved the electronic system for filing official statements and a requirement that dealers send advanced refunding documents to the MSRB. He said the board hopes to have the system for collecting official statements and advanced refunding documents, dubbed OS/ARD, operating by the end of this year or early next year.
Debate over the question of filing secondary-market information on paper was led by SEC Chairman Richard Breeden, who in often sarcastic and exasperated tones warned that many issuers forced to file information on modems and other sophisticated equipment will eventually "throw up their hands" and not participate.
"If I'm the principal of a school district and this system is voluntary, I just might say 'forget it,'" said Mr. Breeden, waving around a large notebook intended to simulate an imaginary instruction manual for the system, which he described as a potential "technical nightmare."
"Can you explain to me why we are making people wade through all kinds of technical gobbledygook" rather than have them simply send the material in the mail? asked Mr. Breeden, who cited the SEC's troubled experience, with EDGAR, the electronic filing system for corporate disclosures that is only just going into operation after 10 rocky years of development.
Brandon Becker, associate director of the SEC's market regulation division, which supports MSRB's plan, explained that the secondary-market information system is intended to take in sensitive information that must be released to the market as quickly as possible. Electronic submission by issuers and trustees would expedite that, he said.
The decision by the SEC complicates efforts by the American Bankers Association's corporate trust committee to implement new secondary-market guidelines for bond trustees, who were expected to be the heaviest users of the proposed system. The group, which prefers the secondary-market system over private repositories, is scheduled to release the latest draft of their standards Monday at a conference in Reston, Va.
"I'm disappointed to hear that the SEC was not ready at this time to go further with sanctioning MSIL as it relates to the secondary market," said Terry McRoberts, executive vice president of Securities Pacific State Trust Co. and chairman of the corporate trust panel.
"But the SEC vote will not interrupt our timeframe" for putting the guidelines in operation, he said. "We've kept our eyes open as to all public and private alternatives," he said, referring to private repositories recognized by the SEC last year to accept official statements.
Bond trustees also have been some of the biggest critics of the fact that the proposed system would not allow paper submission of timely disclosures, such as call notices.
"We appreciated Commissioner Richard Roberts's opening comments on the need for disclosure in the municipal market," said J. Kevin Kenny, president of J.J. Kenny Co. "We believe the meeting today raised issues of concern to everyone involved. And we welcome the opportunity to work with all parties to ensure information is available to investors."
Mr. Roberts had warned that there is a "growing gap" in the amount of secondary-market information available in the corporate and municipal markets.
The SEC's decision to table the secondary-market plan for now is a victory for groups such as the Government Finance Officers Association; the National Association of State Auditors, Comptrollers, and Treasurers; and J.J. Kenny Co. All have warned that the system will cut into the efforts of states and private vendors to improve secondary-market disclosure. The GFOA has argued that there is no demonstrated need for the repository and that the MSRB does not have authority to establish the system.
But SEC staff, in presenting the MSRB's plan yesterday, made clear that it thinks the board clearly has authority to establish MSIL.