I think all issuers would agree: MCDC was a real headache. The Security and Exchange Commission's (SEC) initiative dominated issuers' disclosure-related focus, as well as their administrative work, for most of 2014. The 10-year look-back period, the lack of clarity around what is "material", and the concurrent review by underwriters of issuer disclosure filings all pressured debt managers to devote significant time and energy to the initiative's requirements. A 2015 survey by the Government Finance Officers of America (GFOA) showed that issuers of all sizes experienced costs in weighing whether or not to participate in the initiative, with 79% of GFOA members indicating that they had to hire outside consultants to help them at costs ranging from $2,500 to over $12,000. Survey results also showed that issuers spent between 25 and 250 hours spent in responding to the initiative. That's a lot of public resources in time and money devoted to reviewing past disclosure compliance rather than on programs or enhancements going forward.
As of this writing, the SEC has wrapped up its handling of underwriters' MCDC filings and have now turned their focus to addressing issuer violations. MCDC filings by issuers could range from relatively minor disclosure mistakes, like not updating the rating on insured bonds on EMMA, to significant deficiencies, such as failing to file a required continuing disclosure report. Speculation from market participants is that the SEC could announce thousands of issuer disclosure violations as part of the MCDC initiative. If that is in fact what the SEC finds, the regulator could use it to seek expanded regulatory oversight of the municipal market which, if successful, could include onerous disclosure provisions for issuers.
As painful as the MCDC exercise was, it's important to realize that it was driven by real disclosure shortcomings that have been experienced by both institutional and retail investors, and that opportunities exist to enhance disclosure and avoid another MCDC-type experience again. Coming out of the financial crisis, the decline in use of bond insurance, the reduced confidence in rating agency surveillance, and a number of high-profile bond defaults has put a renewed premium on the importance of continuing disclosure for bond investors. In general, disclosure in the muni market can be limited, it can lack timeliness, and it can lack comparability across issuers. This inhibits the efficiency of the market and directly impacts issuers and taxpayers. For example, academic research shows that issuers with longer disclosure times for filing their annual financial statements have bonds with higher yields, larger spreads, and lower trading frequency. Lack of timely disclosure can also lead to information asymmetry between large institutional investors and smaller investors.
As we await the final shoe to drop with regard to the SEC's MCDC initiative, the municipal market may be at a turning point in terms of disclosure. Is there a market solution to help issuers boost disclosure that would address the concerns of investors and regulators, improving the efficiency of the market and avoiding a major shift in regulatory oversight? Can this be done efficiently, by debt managers with limited time and resources, including smaller issuers? Finally, if issuers provide investors with more consistent and timely disclosure, could that lead to lower borrowing costs and more liquidity - in other words, can issuers 'get paid' for better disclosure?
I think the answer to all three of these questions is 'yes'. The key is to use technology to give investors the disclosure that they want: more timely interim data. Using technology - specifically Investor websites - issuers can efficiently disseminate their already produced intra-year financial and economic data as the data points become public at very little cost. Interim data provided regularly to investors - even if it only means a few data points like revenue collections or budgetary spending updates - are very useful to investors because it helps them value bonds more easily. Providing this data using investor websites makes it a lot easier for investors to process the data for modeling, analysis and comparisons. I think issuers who provide productivity gains to investors through more consistent continuing disclosure will attract more capital and will sell bonds at lower yields because investors will not be applying an uncertainty premium. These ideas - voluntarily disclosing interim financial information and using an investor website to reach investors and post financial and economic data as it becomes public - are also supported by a number of GFOA Best Practices.
In this environment, in which there is so much focus on issuer disclosure, debt managers should view an enhanced disclosure program as an opportunity and not simply as a regulatory burden. The quality of disclosure is just as important to an investor as a bond rating and issuers should devote their resources accordingly. In the wake of MCDC, providing more voluntary disclosure to bond investors may at first seem like a drain on resources, but it may stave off massive changes to the regulatory oversight of the municipal bond market that would be more detrimental to issuers. More importantly for issuers, it likely provides real tangible benefits to taxpayers over time in the form of a more efficient debt financing program.
Colin MacNaught is the CEO of
