Better Disclosure for Municipal Issues

EDGAR, meet EMMA. Today, the SEC announced that it had adopted new rules designating the electronic filing system at the Municipal Securities Rulemaking Board, called EMMA, the central repository for disclosure about municipal finance transactions. Municipal securities are those issued or guaranteed by a government entity. They are exempt from '33 Act registration under section 3(a)(2).

The offering document in a muni finance deal is called an "official statement" and as any librarian who tried to obtain an official statement can tell you, the existing disclosure system is pretty spotty. Presently, there are four designated municipal finance document repositories. None have everything and not all are internet-accessible.

The rule change is, presumably, motivated by the collapse of the market for auction-rate securities. What, I hear you ask (or was that the wind?), is an auction rate security, and what do they have to do with muni finance?

Auction-rated securities were invented in the late 1980's (Tucson Electric Co., 3/88). They were marketed as an alternative to holding cash because, although they didn't mature for many years, they could, theoretically, be re-sold every few days through a private auction process. Municipalities adopted auction-rate debt as a favorite financing device. In February of 2008 the auction process ground to a halt and the securities became unsaleable. For more on the ARS debacle, read Erik Sirri's testimony here and Martha Coakley's here. If that isn't enough, how about an article from the New York Times?

Allow me to provide a concrete example: in January of 2002, the Dormitory Authority of the State of New York issued $450 million auction-rate bonds on behalf of the Sloan Kettering Memorial Cancer Center. The proceeds were used to redeem older bonds. The bonds come due in 2036, but there is supposed to be a repricing auction every seven days. The last auction before the market collapsed was in April of 2008. All the bonds were for sale and there was one bidder. This bidder offered to buy about $18 million in bonds at 2.1% interest.

I got all this info from one of the designated repositories, DAC Bond.