One Up, One Down: Two Approaches to Municipal Disclosure

August 27, 2018

Investors and issuers got two different messages out of Washington in the past 10 days or so, both pertaining to approaches to disclosure to markets. One is a really bad idea to make certain investor disclosure less frequent; the other is a very good enhancement of disclosure requirements in the municipal bond market.

First, President Trump tweeted that he has directed the Securities and Exchange Commission to study whether to shift public companies’ reporting to a semiannual schedule from quarterly public reporting. The theory is that quarterly reporting discourages firms from making long-term investments. According to the Wall Street Journal, the SEC has required quarterly earnings disclosures since 1970 in order to protect public investors and enhance corporate accountability.

Requiring less frequent disclosures is a really bad idea for any market and can lead to less liquidity, higher transaction costs, less certainty in valuations, and more opportunity for insider trading with longer dates between public reporting. There is also very little evidence that quarterly reporting has hindered the ability of long-term focused companies from raising capital. For example, pharmaceutical and biotech companies are able to raise capital efficiently despite drug pipelines that can be many years long. Amazon is another example. CEO Jeff Bezos is famously long-term focused, and yet the company has a market cap of over $929 billion. In every one of his annual letters to investors since 1997, Bezos has reminded investors that the company will plow resources back into research and development.

"…We believe that a fundamental measure of our success will be the shareholder value we create over the long-term…We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions...”

More frequent reporting improves the efficiency of public markets, whether it’s the stock market or #muniland. The President has the right to ask the SEC to study whether there are indeed benefits to less frequent reporting, but I suspect the study will come up empty.

Just a few days after the President’s tweet that seemed to encourage the idea of less frequent disclosure, the SEC broke its own news with a statement that it has finalized amendments to Rule 15c2-12. Currently, this rule defines 14 material events that issuers have to disclose to bond investors.

With the latest amendment, the SEC is requiring further enhancements to disclosure in the muni market. To wit, the disclosure of bank loans and private placements. We’ve written before about the need for issuers to disclose these obligations. They’ve exploded in popularity with both banks and issuers partly for their lower cost and efficiency of execution. However, these agreements typically involve large sums of public dollars, and can include provisions like acceleration that could give a first lien over bondholders.

Like the comment above about the President’s tweet, I think the focus for issuers should always be long-term. Your relationship with your bond investors are long-term, as you will be relying on bondholders to buy your bonds over the next 50 or 100 years. If you think a private placement is in the best interest of your bond program and your constituents, by all means pursue that structure. Just disclose the fact that it was executed and disclose its terms.

Credit goes to the MSRB and its former chair, Nat Singer. Nat is one of the smartest people in #muniland, advising some of the top issuers in the market. When he was chair of the Municipal Securities Rulemaking Board in 2015 and 2016, it circulated a concept release to see whether it should require municipal advisors to disclose information about their issuer clients' bank loans in reaction to the plethora of private placements getting done. This got the ball rolling. As such, I will now refer to this rule change as the “Nat Singer Enhancement to 15c2-12.”

Officially, the compliance date for the rules will be 180 days after they are published in the Federal Register. But issuers should recognize the long-term importance of disclosing these agreements and start to voluntarily post them to EMMA and their investor websites as early as possible.

Colin MacNaught

Colin MacNaught

CEO & Co-Founder @ BondLink