Bloomberg News

U.S. Muni Underwriters Face Rules to Bar Hidden Bond Prices

March 13, 2012

Banks that underwrite U.S. state and local-government debt would be barred from keeping yields on some bonds undisclosed immediately after they are issued under rules proposed by the market’s regulator.

The Municipal Securities Rulemaking Board, which writes regulations for the $3.7 trillion municipal-bond market, today proposed cracking down on the lack of disclosure on the prices of “not reoffered” bonds, or securities that aren’t designated for resale to potential investors.

The rule would prevent banks from designating bonds as not reoffered in written communications unless they also include prices or yields. That information currently may not be available until the end of the first trading day, which could make it difficult to gauge how well the bonds were priced.

“We see this proposal as an important protection for state and local governments,” the board’s executive director, Lynnette Kelly, said in a statement. “We want to ensure that they are able to access complete pricing information about new bonds when in the market.”

The Alexandria, Virginia-based board has been moving to expand the safeguards for state and local governments since the passage of the 2010 Dodd-Frank law, which moved to address the regulatory failures highlighted by the financial crisis. That law also charged the MSRB with protecting public agencies, which lost taxpayer funds when derivative-laden financings pitched by Wall Street banks unraveled when credit markets seized up.

Price Disclosure

The proposed rules released today are aimed at injecting greater price disclosure into the market for newly issued municipal bonds, which are used by states, cities and school districts for public works. Underwriters are typically hired to set the interest-rates on the bonds and line up buyers for the securities.

When an underwriter sells one or more maturities of a new bond issue to a single investor, those securities are sometimes designated as not-reoffered. That can allow the yields to go undisclosed during the first day of trading.

Frank Hoadley, Wisconsin’s capital-finance director, said NROs can prove an obstacle to public borrowers trying to discern whether they got the lowest possible price on their financing.

“It’s a practice that’s gone on for decades that obscures price information from the public, from investors and from issuers,” Hoadley said in a telephone interview.

More Frequent

The use of the NRO designation has “become more obvious and more frequent” in recent years following the global financial crisis, said Bart Hildreth, who has been the editor- in-chief of the Municipal Finance Journal since 1989. He said the proposed rules would improve transparency in a market that’s “still opaque.”

“It’s another step in the movement towards a more efficient market,” said Hildreth, who is also a professor of public management and policy at Georgia State University in Atlanta. “And the municipal bond market needs all the efficiency it can get.”

The board is soliciting comments on the proposed rule. Once drafted, the board’s rules are submitted to the Securities and Exchange Commission for approval.

To contact the reporter on this story: William Selway in Washington at; Brian Chappatta in New York at

To contact the editor responsible for this story: Mark Tannenbaum at

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