(November 1, 2007, update -- Our November print edition notes that a corporate "Edgar" system for disclosure also might be pursued for the municipal bond market. Readers will see that we have some strong comments about how long it could take to get this long-needed system off the ground.)
On July 18, Securities and Exchange Commission Chairman Christopher Cox gave a speech in Los Angeles that urged better disclosure in the municipal bond market. One of the things Cox talked about is using the Internet to let investors get updated financial information similar to what they can currently get about stocks. The Bond Advisor wrote to regulators (including the SEC) two years ago urging the same thing. If Cox is really serious about improving the market for individual investors, he will keep pushing for a new disclosure "bank" that lets all investors see material event disclosure at the same time and at no charge. (Stock investors can go to the "Edgar" system for a level playing field, and this is what the municipal bond market needs.) Below are the opening paragraphs and the two closing paragraphs from what we said about the topic in July 2005, marking the 10th anniversary of the municipal bond market's disclosure law.
Reprinted from the California Municipal Bond Advisor's July 2005 edition.
All rights reserved.
"How is the Bond Advisor marking a little-noticed anniversary in the municipal bond market? We are writing letters this month to the Securities and Exchange Commission, certain members of the Municipal Securities Rulemaking Board, and a few other market participants to make a case for continued improvements that benefit individual investors .....
"So why are we contacting the regulators and others? The Bond Advisor has been concerned for a long time about the way disclosure works its way into the market. Let us set the stage for our gripe this way. You may recall a year or so ago (or maybe it has been longer) when the SEC and others threw a fit over allegations that some mutual funds were engaging in after-hours trading, or pursuing other conduct, that seemed to give them an advantage over other investors. Regulators are always trying to deal with such fairness issues, especially in financial markets where the participants range from mom-and-pop types to huge funds and other big institutions.
"In our opinion they have dropped the ball in the municipal market when it comes to dissemination of disclosure. Everybody, including individual investors, should have free and open access to disclosure whenever it is released. But that isn’t the way disclosure was set up in the municipal market. Issuers and others required to file reports send their information to privately-run “repositories” that then turn around and charge people to see it. For the mutual funds and other big players in the market, this isn’t a big deal. They get access to the secondary market disclosure through bundled subscription services (such as dedicated terminals) and they pay a pretty penny to do so. In our view this gives them a leg up on the rest of the world because they get to see disclosure documents long before this information finally gets forwarded to others (whether or not your holdings are in street name). This is unfair, it discriminates against smaller investors, and in the event of a real surprise it could let some people buy and sell bonds in the market long before others had a chance. While many of you wouldn’t want to track most muni disclosure that closely, except for riskier bonds, it is the principle that matters here. After 10 years, it is time for the municipal market to tackle even more reforms to create a transparent and fairer market."
The Bond Advisor has complained for years about the poor treatment municipal bond investors receive relative to other fixed-income markets in the U.S. For a change it appears the little guy has a friend at the Securities and Exchange Commission.
Given that there are $2.5 trillion of municipal bonds outstanding, investors might assume that they "are fully protected by the same high standards that operate elsewhere in the U.S. capital markets. Not exactly. And not even close," SEC Chairman Christopher Cox said in a July 18 speech in Los Angeles.
Cox traces much of the difference to historical reasons "because the federal securities laws were adopted when municipal finance was a relatively small and uninteresting corner of the nation's capital markets." But the muni bond market is far larger and more complex now. As a result, today muni bond investors "in many respects get second-class treatment under current law," Cox said.
Most of the SEC's power in this market is confined to cleaning up messes after they occur. Cox said there needs to be more emphasis on making sure investors get "full disclosure" when the securities are sold.
Cox also identified other flaws the Bond Advisor has stressed in the past, including the staleness of information that is provided.
Disclosure also could be provided in a better way "by tapping the power of the Internet to provide an easily accessible, free source for the display of that information, similar to the SEC's EDGAR system," Cox said. (See our past comments about that to the left.)
Cox had a lot more to say about the topic, and much of it we found heartening. Whether or not Congress would have the guts to tackle meaningful reform is a problem, however, and already the government issuers are griping about any changes. (The municipal bond market is the only place in the capital markets where the borrowers, not the lenders, believe they should set the terms of the transactions!)
If you are interested in seeing all of Cox's prepared remarks, just click here.
SEC's Cox Sends Muni Ideas to Congress
SEC Chairman Christopher Cox on July 26 sent a "white paper" to Congress to push for improved disclosure and accounting in the municipal bond market.
Investors and market participants can read the white paper by going here. Relevant to our past recommendations discussed to the left, here is one step Cox recommends:
"Making available to investors without charge municipal issuer offering documents and periodic reports on a timely basis through an easily accessible venue, such as a system similar to EDGAR." The Bond Advisor has said repeatedly, and for many years, that individual investors are getting ripped off by the current system that funnels key "material event" disclosure to private repositories. It is time to end this disgusting practice that favors big investors over the moms and pops.
(July 30, 2008 -- The SEC has voted to pursue a free central "repository" for municipal bond continuing disclosure. Our same idea to fix this system is discussed below in older articles.