April 15, 2010

Municipal Auction Disclosure Hampered, Adviser Says

By Darrell Preston

April 15 (Bloomberg) — -- The Municipal Securities Rulemaking Board, the top watchdog in the $2.8 trillion municipal bond market, will find its effort to make auction-rate securities more transparent hampered by requirements that details be submitted in imaged documents, according to a comment on a filing with the U.S. Securities and Exchange Commission.

The rulemaker last month proposed to the SEC to broaden disclosure by demanding those handling auctions provide bid details to the board. The plan was part of measures by the Alexandria, Virginia-based MSRB to expand information for investors about how yields are set at auction and on variable- rate securities.

Details are supposed to be registered in the form of portable document format, or PDF. Investors won't be able to easily use the data for analysis, said Joseph Fichera, senior managing director and chief executive officer of New York-based financial advisory firm Saber Partners, in his comment.

The information will be available "in a form that is inconvenient and burdensome for investors and analysts to convert back into a readily usable form, "Fichera wrote in an April 12 comment on the MSRB's proposal that he supplied to Bloomberg News. "All well-functioning markets require information to be easily accessible and comparable."

The board's proposal would require dealers to disclose details on bids, types of bidders and orders for auction-rate securities, such as the number of orders to buy and sell and whether dealers are bidding. The securities are long-term debt with interest rates reset weekly or monthly through auctions.

More Transparency

Dealers and auction agents already maintain the information they have to disclose in an electronic format that could be easily used, Fichera said in his comment.

The MSRB began seeking more transparency two years ago after the collapse of the then $330 billion auction-rate market when investors complained they weren't given enough information. The market crashed when dealers, who were allowed to bid to prevent failed auctions, halted the practice. The market now totals about $70.1 billion.

One investor, Vladimir Drozdoff, who filed the only comment posted on the SEC's Web site, supports the proposal. Fidelity Investments, the world's largest mutual fund company, hasn't provided information he has requested about auction-rate securities he holds, according to his April 4 letter. A "complete lack of transparency creates the opportunity for manipulation and unfair dealing," Drozdoff wrote.

Fidelity, which doesn't comment on specific customers, has a limited role in auctions because it isn't an underwriter or auction agent, said spokesman Adam Banker. The company provides information about auction-rate securities and auction dates, he said. The company has access to few additional details about auctions and what details it has it makes available to customers, he said.

The MSRB and Drozdoff didn't immediately respond to requests for comment.

--Editors: Walid el-Gabry, Jerry Hart

To contact the reporter on this story:
Darrell Preston in Dallas at +1-214-954-9454 or dpreston@bloomberg.net.

To contact the editor responsible for this story:
Mark Tannenbaum at +1-212-617-1962 or mtannen@bloomberg.net