What corner of the financial markets is valued at about $1.5 trillion, is less regulated than hedge funds and is still unable to provide investors with state-of-the-art information flow?
No, it's not the market for some newfangled financial instrument like credit default swaps: It's the U.S. municipal bond market. Almost two centuries after New York City sold the first officially recorded muni issue, in 1812, the marketplace is still trying to create a reliable way to relay financial information about all issuers to investors.
A lack of easy access to such information forces investors to search for data on muni bonds and can even have an effect an institution's portfolio. Funds subject to the Securities and Exchange Commission's Rule 2a-7 may have to sell a security if they can't find current information on it. "What we're looking for on the buy side is timely information, filed and accessible to us," says Ruth Levine, head of municipal credit research at Valley Forge, Pennsylvaniabased Vanguard Group, which manages nearly $80 billion in munis.
Levine may soon get her wish. In recent months industry groups have tried to improve a patchwork of technology solutions to help the country's 50,000 municipal issuers file their financial data and make it easier for investors to find it.
One reason for the problem: The SEC lacks the authority to compel state and local governments to disclose financial information to bondholders. But in 1994 the SEC ordered municipal underwriters, over whom it has jurisdiction, to begin requiring issuers to agree to file original offering documents and ongoing disclosures with one or more nationally recognized municipal securities information repositories, or NRMSIRs.
This backdoor disclosure system has not been very effective. Fort Lee, New Jerseybased DPC Data, one of four NRMSIRs, along with Bloomberg Municipal Repository, FT Interactive Data Corp. and Standard & Poor's Securities Evaluations, found that in 2000 and 2001 between 30 and 40 percent of issuers that should have filed did not. For small issuers "it is an ongoing chore, and they don't see value in it," says Peter Schmitt, president and chief executive officer of DPC Data.
A 2001 SEC study found that documents stored at the four NRMSIRs did not agree with each other more than 80 percent of the time. Without an industry standard, filings are often misidentified, arrive in many formats and may not get to all four NRMSIRs. To remedy this and other problems, a consortium of municipal bond industry organizations, working with the SEC, set up a so-called central post office in September 2004. The CPO, DisclosureUSA.org, takes documents from issuers, indexes them and transmits them to all the NRMSIRs.
The new data services may help. In 2002 accounting firm Ernst & Young helped launch Orlando, Floridabased Digital Assurance Certification, a dissemination agent and investor relations service bureau for municipal issuers. "DAC brings liquidity of information to the municipal market by pushing information to all interested recipients across the board," says Paula Stuart, the company's CEO and, since April, its sole owner.
DAC helps issuers file disclosure documents, alerts investors to filings and warns them if an issuer fails to file. Since launching, it has signed up about 1,000 issuers with roughly $223.5 billion in bonds outstanding, or about 15 percent of the muni market. The company's online database of filings for all its client issuers, indexed by full, nine-digit Cusip numbers, gives investors fast, free access to information. DAC also offers investor relations services such as Webcasts to issuers. "We prefer DAC's Web hosting to our internal Web site," says one client, Patrick Born, chief financial officer of the city of Minneapolis, which has $1.5 billion in bonds outstanding. "It is less expensive, and we expect to receive more traffic from institutional investors with a central location."
Meanwhile, DPC Data is using Web technology to make it easier for investors to integrate issuer data held at DPC into their own systems.
Will municipal investors ever experience the kind of clarity delivered by the SEC's Edgar corporate filings database? Martha Haines, chief of the SEC's Office of Municipal Securities, believes that the advent of the CPO and the Bond Market Association's real-time price feed have brought "almost full transparency in the muni market." But if issuers don't file, technology can't fix the problem.
