The information being presented has been compiled from sources considered to be reliable but no assurance can be given that those sources are accurate or the information changed since the publication of this article. Limited by the Securities Act of 1933, Securities Exchange Act of 1934 and its founding legislation, the Securities Exchange Act 15B, the MSRB found its ability to compel municipal bond issuers to disclose hobbled. Issuers of municipal bonds are public entities, municipal securities dealers are private entities. For a “helpful guide” to frame municipal disclosure practices and procedures, it points to Regulation Fair Disclosure (65 FR 51716). They also object to the matter of the matter of the sovereignty issue as set forth under Article 10 of the US Constitution. This piece discusses how both Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB) continue to doggedly pursue disclosure improvements in the municipal bond market. Congress has the power to regulate commerce “among the several states.” The sale of a municipal bond—a debt security—across state lines constitutes commerce. But it could sure compel the underwriters and broker dealers selling and trading the bonds of those issuers. Opinions expressed by Forbes Contributors are their own. Recently, they took advantage of both. As the municipal bond market grew (in 1994, there were roughly $1.5 trillion in outstanding bonds compared to nearly $4 trillion today), the rule continued to be … Investors, borrowers, bond counsel and broker/dealers all have their very distinct—and sometimes opposing—views. It is entirely possible that what is “‘encouraged” now could eventually appear as must-haves in disclosure agreements. As part of the 2018 tax reform legislation passed by U.S. Congress, municipalities were prohibited from tax-exempt advance refunding, but could refinance the debt with taxable municipal bonds. Having bulked up in 1994 with the adoption of further amendments to the Rule, the MSRB flexed its regulatory muscle to “deter fraud and manipulation” in the market. Currently, there are 16 material event disclosures codified in the rule, requiring an issuer to post if one (or any) occur. Restricted by legislation from accomplishing that by regulating municipal bond borrowers directly, they have wisely applied the substantial powers they have to regulate market participants in order to enforce better disclosure from municipal borrowers. After all, municipal securities dealers fall under the regulation of the Securities Exchange Act 15B specifically because they engage in “interstate commerce to effect any transaction [inducing] the purchase or sale of any municipal security.” If the purchase and sale of the goose’s eggs can be regulated, why not the goose? My perspective comes from my extensive investment career advising to and making investments for pensions, mutual funds, insurance companies, family offices, and investment advisors. Next in the six-part series: The SEC and MSRB aren’t the only one’s setting out disclosure standards in the municipal bond market. Municipal Bond Market Disclosure: Through The Legal Looking Glass. If broker/dealers wanted to engage in the underwriting and secondary market trading of their primary market bond issues, they were required to get a continuing disclosure statement from an issuer. No disclosure? Ciccarone contends that the Tower Amendment arguments overlook a constitutional issue, specifically the Commerce Clause. As always, investors must consider their own financial circumstances before any investment decision. Ciccerone has not only given this subject considerable thought, but he dedicated a large part of his career to it. The SEC and MSRB released a public statement on May 4, 2020, The Importance of Disclosure for our Municipal Markets, in which it offered quite explicit guidance to “encourage” issuers on what and how to disclose. The regulators didn’t stop there. In any legal matter, there is always going to be counterargument. The issuer’s bonds might be sold and distributed across state lines by others, but the issuers themselves aren’t doing that. Borrowers are encouraged to listen. Back in 1986—well before the internet, “‘big data,” the MSRB, and EMMA—he was tapped to build out a municipal research database and software package that ultimately led to the creation of the Merritt System. It’s a thread-thin line perhaps, but it is a line nonetheless. Congress (or its agents and assigns—i.e. Issues of sovereignty may apply to any number of things but regulating the disclosure of securities in financial markets is not one of them, in Ciccarone’s view. This provides critical information not only to internal and external government administrators, but to investors as well. The SEC and MSRB have set out some very clear “best practices.”. While the SEC and MSRB might not be able to establish a disclosure framework for the municipal bond market by direct fiat, they actively use their bully pulpit and big stick oversight powers to offer disclosure guidelines to the market and its borrowers. Reg FD codifies best practices for corporate issuers. regulators) can therefore step in to impose rules and regulations on those securities. Regulators have the "big stick" to back up what they say. The SEC and MSRB have doggedly pursued better disclosure for the municipal bond market. Disclosure was a big part of that deterrence strategy; municipal bond underwriters were compelled to get written disclosure agreements, in compliance with MSRB guidelines, from their bond issuer clients. No underwriting, no trading. They object, in the first place, to the Goose’s Eggs analogy on the grounds that the issuer isn’t engaging in interstate commerce; rather, the underwriter is. This article is the third of a six-part series on investor disclosure in the municipal bond market. Seven of those specifically refer specifically to municipal issuers, the first one in the introductory paragraph. Additionally, new technology was integrated into the solution. If there is a legal conflict between the Constitution’s Commerce Clause, Article 10, and the Securities Acts of 1933 and 1934, it can only be resolved by one body: the Supreme Court. This is a crucial regulatory distinction: the feds can regulate private companies, but they cannot impose regulations, at least in this regard, on states. But is there a constitutional solution that makes all this legal maneuvering moot? They have also encouraged what should be disclosed and the framework for that disclosure. She continued, “[SEC] Chairman Clayton and I thought it was important to highlight this focus in light of the potentially significant effects of COVID-19 on the finances and operations of many municipal issuers.”. ), This statement is consistent with the long-standing position on disclosure by these regulators. With rates at historically low levels, and demand … The statement also points to the many reports for “other governance purposes” municipal issuers routinely prepare and release. My perspective comes from my extensive investment career advising to and making investments for pensions, mutual funds, insurance companies, family offices, and. The MSRB created “Electronic Municipal Market Access” (EMMA) as the official source for municipal securities data and disclosure documents with mandatory filing requirements. Important point: Reading through all this, one cannot help but notice that the vast majority of this guidance and encouragement outlined here apply regardless of the state of public health. (Note the word “encourage” is applied no less than thirteen times in the SEC’s May 4 statement. Issuance of taxable bonds totaled US$70 billion in 2019, increasing 135 percent over the prior year. “Investor access to accurate, timely, and comprehensive information about municipal issuers and their securities has long been a focus of the SEC,” stated Rebecca Olsen, the Director of the Commission’s Office of Municipal Securities. To those timid souls fretting about potential liability—there are no “safe harbor” rules on the governmental side preventing potential legal action for forward looking statements—the SEC promises that such good-faith, forward-looking disclosure would not be “second guessed”. Interpret that as you will, but it sure sounds something like ‘if the corporate market can do it, the municipal bond market can too.’. © 2020 Forbes Media LLC. Last year, we witnessed a surge in taxable municipal debt relative to tax-exempt debt. According to some legal-eagles, the reason the Commerce Clause argument doesn’t apply to municipal bonds is two-fold. All Rights Reserved, This is a BETA experience. You may opt-out by. This article is for informational purposes only and is not intended to solicit an investment, nor constitute investment advice. It goes even further. For example, the release explicitly encourages borrowers to provide investors with forward-looking statements during this time, including five very clearly detailed bullet points explaining the why and the how. Richard Ciccarone, president of Merritt Research Services (an Investortools Company) and a long-time municipal bond market veteran, offers a different perspective on the legal limitations oft cited in regard to disclosure. EY & Citi On The Importance Of Resilience And Innovation, Impact 50: Investors Seeking Profit — And Pushing For Change, adoption of further amendments to the Rule. These may not be regulations, but the SEC is speaking loudly and has a big stick to back up its statements. Currently, there are no cases regarding this matter on the Court’s docket.