Municipal Securities Disclosure Goes Electronic

Will the MSRB join the SEC and FDIC and use XBRL as its underlying information standard or will it choose to lock up information in blubs of electronic text?

January 3, 2008
by Liv Watson

DISCLOSURE: Readers should assume that all views expressed in this column are the author’s and do not necessarily reflect the views of the AICPA or the AICPA Corporate Finance Insider.

As more and more regulatory agencies face the challenge of collating, processing and reporting information more efficiently and cost effectively, eXtensible Business Reporting Language (XBRL) is fast becoming the preferred global information standard in the financial and business reporting supply chain.

Inside the MSRB

Recently the Municipal Securities Rulemaking Board (the “MSRB”) filed a proposed rule change with the Securities and Exchange Commission (the “SEC”) to implement a pilot project for an Internet-based portal to provide free public access to official statements and advance refunding documents. The MSRB expects the pilot portal to become operational on March 10, 2008.

The key question is whether MSRB will join the SEC and FDIC in using XBRL as its underlying information standard or take its proposed electronic disclosure system in the direction of locking up information in “blubs” (a hypothetical programming language intended to represent an average programming language) of electronic text.

Today the MSRB is a self-regulatory organization that is subject to oversight by the SEC. The MSRB is a rule maker but does not have enforcement authority. The activities of brokers, dealers and municipal securities dealers (collectively referred to as "broker-dealers") relating to municipal fund securities are subject to MSRB rules.

Behind MSRB

Congress created the MSRB when it passed the Securities Acts Amendments of 1975 because of several bond defaults. Prior to a default by the City of New York in 1975, tax-exempt securities were basically thought to be "risk free." Before these amendments, financial institutions that engaged in municipal securities transactions did not have to register with any regulator. In fact, both the Securities Act of 1933 and the Revised Securities and Exchange Act of 1934 were enacted with broad exemptions for municipal securities. The rationalization behind the exemptions was the lack of perceived abuses in the municipal securities market as compared with the corporate capital market. Furthermore, typical purchasers of municipal securities were institutional investors with financial expertise. However, that has changed. In 2006, new bond issuers reached a record $408 billion, with a value of more than $2 trillion of outstanding bonds. Today more than half of those amounts are held by individuals through individual accounts or mutual funds.

Public sentiment for increased disclosure for bonds reached a new height in 1983 when the Washington Public Power Supply System defaulted on $2.45 billion in tax-exempt bonds. Congress immediately requested that the SEC investigate whether federal securities laws had been violated. On September 22, 1988, the SEC released the results of its extensive investigation to Congress. At the same time, the SEC published a Release requesting comment on several initiatives that were designed to improve the quality, timing, and dissemination of disclosure in the municipal securities markets. The Release proposed adoption of Rule 15c2-12 under the Securities Act of 1934. While the Rule was adopted in the wake of the Washington Public Power Supply System default, it was also in response to a widely-held belief that there were problems in the timeliness and access to official disclosure statements.

MSRB Today

Since 1990, underwriters of municipal securities file an official statement or offer document for most municipal securities offerings with the MSRB’s Municipal Securities Information Library and four SEC-approved Nationally Recognized Municipal Securities Information Repositories (NRMSIRs). But the problem lies in the accessibility and usability of the information. The information is not free and you need to call MSRB at (703) 797-6600 to request the information. You can also purchase the information from SEC-authorized NRMSIRs that collect and disseminate these documents to the public. There is a $25 delivery fee by mail for a copy of any single document, including Material Event Notices. There is a $5 fee by fax for the first page and $1 for additional pages. In today’s information age, surely there is a better way to protect investors.


Clearly there is a huge amount of inefficiency in the marketplace. Despite a great deal of work by the municipal issuers to prepare their disclosures, only a small group of companies control access to the documents that are supposed to be public. Problems in timeliness and accessibility to official disclosure statements are still unresolved. The MSRB will be asking for comments during the pilot project and it is encouraged that Corporate Finance Insider readers send in comments in support of adopting XBRL as the underlying information standard for a new central repository where investors can have access to timely interactive reusable data format.

The current NRMSIR model severely limits innovation and access to these important disclosures because it locks up public documents in private hands. New proposed portals run by public entities encourage transparency in the municipal securities market thereby creating a healthy ecosystem of information that will ultimately benefit both the investment community and the municipalities that seek access to public markets. Let’s just hope that the MSRB and the SEC are smart and choose XBRL as the open source information standard.

The push for more timely, accurate and thorough disclosures must become a common goal embraced by all municipal market participants as well as the entire fixed-income industry. Studies have shown that increases in accurate disclosure can translate into lower capital market costs.  

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Liv A. Watson is Vice President of Global Strategy for Norwalk, Connecticut-based EDGAR Online Inc. (NASDAQ: EDGR) — a provider of global business and financial information.