The National Federation of Municipal Analysts (NFMA) held its 33rd annual conference in Chicago earlier this month, featuring a panel to address disclosure across the municipal bond markets.
The discussion quickly turned into a bashing of the SEC's Municipalities Continuing Disclosure Cooperation (MCDC) initiative.
Launched in 2014, the SEC MCDC initiative was intended to address "potentially widespread" violations of federal securities laws by municipal issuers and bond underwriters in connection with representations about continuing disclosures in bond official statements.
The SEC had no interest in reviewing thousands of bond issues, so it came up with the next best thing: asking underwriters and issuers to "voluntarily" report disclosure violations in exchange for leniency.
MCDC applied to bonds sold to the public in the previous five years, and underwriters and issuers had until the end of 2014 to self-report to the SEC.
The review process was complex, requiring a comprehensive analysis of past disclosure to find any failures to disclose not communicated in official statements.
Hospitals and their legal counsels then had to determine if each failure was material enough –and do so without any guidance from the SEC.
Some hospitals didn't bother with an independent review, relying instead on bond underwriters to identify any potential violations under MCDC.
According to a 2015 report by MuniNet Guide, hospitals are generally better at disclosure than the rest of the municipal sector.
Hospitals who decided to conduct their own review spent a lot of time and money, only to come up with relatively minor infractions, typically:
- Failure to post bond insurer rating changes
- Late posting of audited financial statements and other financial information
- Information posted on EMMA for some CUSIPs but not others.
The SEC has not provided much information on the type and number of violations reported, leading some issuers and municipal market groups to question whether MCDC was worth it.
At the NFMA roundtable, Ben Watkins, director of bond finance for the State of Florida, called MCDC "the most misguided, coercive, punitive approach to improving continuing disclosure" he had ever seen.
Watkins, a CPA and lawyer, went on to describe MCDC as a "monumental waste of resources".
A Securities Industry and Financial Markets Association (SIFMA) official was more restrained, saying he couldn't think of "very much good to say about MCDC".
The lone SEC official at the roundtable disagreed, describing MCDC as very successful.
This claim is hard to evaluate given the SEC's silence on reported violations, but cynics suspect the $18 million in total fines extracted from underwriters may be the main factor the agency used in declaring the program a success.
The roundtable boiling point may have been reached when the SEC official stated that MCDC was "voluntary and cooperative".
Watkins responded that a program can hardly be called voluntary if the consequence of not reporting would be that the SEC would "come and find you and throw you in jail".
The SEC said it will be bringing actions against issuers as its next step.
Most everybody agrees that increased transparency in the municipal bond markets is a good thing, but the tricky part is how to go about making it happen.
A start would be for the SEC to make MCDC results available in summary form, including data on the types of violations.
This would benefit everybody including regulators, who would be able to better focus their efforts.
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