What seems like a tiny tally is causing a big controversy in the world of municipal finance.
State and local government officials are pushing back against a proposal from the Municipal Securities Rulemaking Board that would reveal to their bondholders a potentially embarrassing fact: how long it takes them to post their audited financial statements.
That count of the days between the end of the fiscal year and the appearance of annual reports, to be disclosed on the MSRB website where securities filings are posted, is an effort to give the $3.8 trillion municipal-bond market some of the transparency that’s long been demanded from publicly traded corporations, whose annual reports have to be filed with the Securities and Exchange Commission as soon as two months after their years end.
There’s no hard time-frame imposed on states and cities because of an exemption carved into the law 45 years ago. Instead, the SEC polices the market indirectly through securities firms that can’t underwrite municipal debt unless governments agree to make periodic financial disclosures. That circuitous route has allowed many governments to face little consequence for failing to do so: when the SEC offered to go easy on borrowers and banks that came clean about violating the law to encourage better compliance in the future, dozens of governments and underwriters accepted the offer.
The calculator would cast a bit of public shame over the worst scofflaws. But it has riled some government officials and bond analysts who say it’s an imprecise and potentially buggy bit of reckoning that was designed without their input.
“It feels to me like this is a freight train that has left the station and we got left behind,” said Emily Brock, director of the Government Finance Officers Association’s federal liaison center.
Her group is among those that have since weighed in on the proposal by submitting comments to the SEC, which has the final say on the MSRB’s rules. Among them is the National Federation of Municipal Analysts, a bond-analyst group that generally welcomes more information.
Yet the group said the MSRB’s timer could be misleading, inaccurate or error-prone enough to do more harm than good. For example, they said the clock could be triggered by a filing that’s not the audited financial statement, potentially making tardy filers look better than speedy ones. “It will be comparing apples to oranges,” said Lisa Washburn, a Municipal Market Analytics managing director who works with the analysts group.
There’s also the possibility a government that has neglected its duty for years could simply reset the clock when it files documents ahead of a new bond sale, leaving would-be buyers unaware that it has a history of not keeping them up to date about the state of its finances. Moreover, there’s no universal deadline in the disclosure agreements governments sign, so a day count wouldn’t necessarily let an investor know if they’re not living up to their promises.
Such concerns are misplaced, Gail Marshall, chief compliance officer at MSRB, said in a Feb. 6 letter. She said the clock itself would give governments an incentive not to make mistakes when posting bond documents to the board’s website. She said the MSRB would be willing to let governments and others preview the tool -- and offer potential changes -- before it’s released to the public as soon as July.
Ben Watkins, director of the state of Florida’s division of bond finance, is skeptical. “It’s all about giving the appearance of actually doing something when in reality it does nothing to improve information available in the marketplace,” he said.
This article was provided by Bloomberg News.