Municipal Bond Investors Get Better Information

The Securities and Exchange Commission approved municipal bond investment rule changes to improve information available to municipal bond investors. The Rule changes become effective for primary offerings of municipal securities after December 1, 2010. This will affect municipal bond fund holders, since better information cuts down on risk of investing.

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Reasons for SEC Rule Changes

Expanded disclosure helps investors protect themselves against fraud involving municipal bonds. The amended SEC rule requires information about events that affect the value of municipal bonds or their tax status. The old Rule did not impose a firm deadline; in some cases, investors complained that disclosure came months after the fact, when it was less useful. Now there are deadlines.

The SEC narrowed an old exemption for disclosure about demand securities, including variable rate demand obligations (VRDOs). VRDOs are long-term bonds whose interest rate adjusts frequently and whose holders have the option to redeem the bonds on short notice. The market for these securities is now quite large and can be volatile, as seen in the fall of 2008, underscoring the need for investors in such bonds to have access to timely information.

Who is affected by the SEC Rules changes?

• Individuals who own municipal bonds directly or indirectly through mutual funds, trusts, or pension funds;
• Institutional investors who own municipal bonds;
• Money market mutual funds, which are the largest buyers of VRDOs;
• Brokers and others who sell or recommend municipal bonds to customers; and
• The states and local governments that issue municipal bonds and municipal bond conduit borrowers, such as non-profit hospitals, low and moderate income housing projects, and colleges and universities.

What are the changes?

SEC rules adopted in 1989 and amended in 1994 and 2008 required underwriters of municipal bond offerings to determine whether the issuer or obligated person had agreements in place to provide certain information in an electronic format to the Municipal Securities Rulemaking Board (MSRB). Prior to these amendments, the information was limited to: certain annual financial and operating information and audited financial statements; notification of the occurrence of 11 specific events, if material; and notification if an issuer failed to file its required annual financial information on time.

The MSRB now makes certain information provided by the issuer or obligated person available to the public on its Electronic Municipal Market Access (EMMA) Internet site (www.emma.msrb.org). EMMA is a comprehensive, centralized online source for free access to official statements, continuing disclosure documents, advance refunding documents, and real-time trade price information on municipal securities.

The changes will do the following:

• Specify that disclosure be made within 10 business days of the occurrence of a listed event;
• Add four new disclosure events to the list;
• Provide for disclosure of six currently listed events whenever they occur – not only when an issuer determines them to be material; and
• Extend the same rules to new primary offerings of VRDOs. Previously-issued VRDOs will remain exempt.

What types of events will be disclosed?

Under the amended rule, information should be provided about any:

* principal and interest payment delinquencies with respect to the securities being offered
* unscheduled draws on debt service reserves reflecting financial difficulties
* unscheduled draws on credit enhancements reflecting financial difficulties
* substitution of credit or liquidity providers, or their failure to perform
* defeasances
* rating changes
* tender offers
* bankruptcy, insolvency, or receivership
* adverse tax opinions and IRS determinations that bonds may be taxable (including other material events affecting the bonds’ tax status)

In addition, the following six events will be disclosed if they are material:

• non-payment related defaults
• modifications to the rights of securities holders
• bond calls
• release, substitution, or sale of property securing repayment of the bonds
• information on mergers, acquisitions, or consolidations
• appointment of a successor or additional trust, or change in the trustee’s name

More information about the municipal bond market is available from the SEC’s Office of Municipal Securities, or from the Municipal Securities Rulemaking Board.