Monday, October 12, 2015

EMMA: Time to Grow Up and Be Like Your Big Brother, EDGAR

In 2009, the Municipal Securities Rulemaking Board (MSRB) launched its Electronic Municipal Market Access (EMMA) system: the place to go for all things muni. EMMA contains information about all publicly traded municipal bonds and their issuers including offering documents, trade activity, ratings, issuer financial statements and event notices (such as those required when an issuer misses a payment or calls its bonds).

As a frequent user, I’m impressed not only by the wealth of information available on EMMA, but also with the system’s usability, reliability and ongoing feature improvements. That said, EMMA has very serious limitations that are inconsistent with both open government and a liquid municipal bond market.

In a 2014 open letter to the MSRB, the Sunlight Foundation pointed out that restrictions on downloading and the fact that much of EMMA’s data is still in PDF form greatly limit the system’s transparency. In these respects, it is worth comparing EMMA with the SEC’s system for collecting and presenting company financial filings, which is known as EDGAR (Electronic Data Gathering, Analysis and Retrieval).

Unlike EMMA, EDGAR provides free FTP and RSS access, allowing users to consume as much content as they wish. EMMA only offers bulk downloads as a high cost subscription option and specifically forbids using automated techniques to quickly capture (or “scrape”) site content. It also limits the number of records that can be returned in “Advanced Searches”, hampering the ability of market participants and academic researchers to gather and analyze the big data EMMA contains.

EDGAR further facilitates analysis by providing key company disclosures – most notably quarterly (10-Q) and annual financial statements (10-k) – in machine readable format. Municipal financial statements on EMMA typically appear only in PDF form, requiring laborious parsing or re-keying to obtain usable data.

Recent legislation proposed by Congressman Darrell Issa (R-CA) and co-sponsored by 26 other representatives from both parties would require MSRB to implement machine-readable disclosures on EMMA. The Financial Transparency Act of 2015 (HR 2477) mandates the use of standards based, machine readable disclosures by all financial regulatory agencies and self-regulatory bodies deriving their powers from federal regulators. This includes the MSRB whose power to oversee the municipal securities market is delegated by the Securities and Exchange Commission (SEC).

The SEC also operates EDGAR, which – as we have seen – is far more open than EMMA. But the SEC has not always been an exemplar of open data. It took a combination of outside pressure and bureaucratic innovation to make corporate financial disclosure fully open.

As late as the early-1990s, the primary method of reporting corporate financial results to the public was through printed annual reports and paper regulatory filings. Even after the SEC received company filings electronically, it proved unable to share this machine readable data with the general public.

This situation changed by virtue of work done by Carl Malamud, a northern California open government advocate. Malamud obtained SEC disclosures and began posting them on a web site he built with a National Science Foundation grant. Seeing the success of Malamud’s efforts, the SEC was shamed into providing this service itself. More recently, Malamud, through this work at Public.Resource.Org, has made a similar breakthrough with not-for-profit organization disclosures submitted to the IRS –Form 990. Malamud’s group began putting these forms on line at no charge a few years ago, and recently won a court judgment against the IRS requiring the agency to provide the Form 990 disclosures in machine readable format.

Meanwhile, the SEC has continued to improve EDGAR data. When it began publishing corporate disclosures in the late 1990s, the data appeared in SGML format (SGML is a close relative of HTML). SGML is more easily parsed than PDFs, so the SEC was way ahead of the MSRB and the IRS from the start. But the SGML disclosures were not self-describing: the data files were not tagged in such a way as to provide consistency across files. In the mid-2000s, the SEC began to embrace eXtensible Business Reporting Language (XBRL) which is self-describing. Beginning in 2009, the SEC began to mandate that corporate filers use XBRL – starting with the largest companies and working down to smaller ones. Now EDGAR users can click an “Interactive Data” button next to each disclosure to see the XBRL rendered as an interactive web page.

To this author, it seems odd that private companies and now private, not-for-profit entities have more accessible financial filings than do state and local governments. Many private organizations affect relatively small number of stakeholders – perhaps just a few hundred customers, employees and shareholders. But governments large enough to issue bonds touch the lives of thousands of taxpayers, service users, beneficiaries and other parties: their financial affairs are much more a matter of public interest.

EMMA could serve that public interest if its content were more open – but a number of factors prevent this. For example, MSRB’s board contains members employed by firms in the municipal bond industry whose revenue might be reduced by greater industry transparency.

Some of the content on EMMA is proprietary. This restricted data includes CUSIP numbers that identify each bond, as well as credit ratings. CUSIPs are owned by the American Bankers Association and administered by McGraw Hill Financial; they normally cannot be displayed on a web page without a costly CUSIP license. Although individual bond ratings may be freely reproduced, rating agencies take measures to prevent the bulk redistribution of credit ratings, because they sell ratings feeds to large financial industry customers. Finally, the MSRB also realizes revenue from selling EMMA content in bulk:  users are offered subscriptions to EMMA data feeds that includes various portions of the primary market and continuing disclosures available on the system.  If this material could be bulk downloaded at no charge, MSRB would lose subscription revenue.

While these institutional factors may preclude free bulk access to EMMA content, it is less clear why MSRB has not mandated filings in XBRL or some other open, standardized format – rather than PDFs. This idea appeared on an MSRB road map in 2012, but there does not seem to be momentum toward implementing it.

That situation would change if the Financial Transparency Act of 2015 (HR 2477) becomes law. Once PDFs are replaced by structured data, the cost of creating municipal finance data sets will greatly decline and their availability will greatly increase. The ultimate results should be better value for municipal bond investors and substantial cost savings for cities, counties, school districts and other issuers.

Friday, October 9, 2015

Investigations of Fund Fees (and Fees and Fees)

With the Blackstone settlement from earlier this week (see below), now is as good a time as any to start a list of investigations into fund fees.  If we're missing any, let us know!
  1. April 2018: A.G. Schneiderman Releases New Report On Mutual Fund Fees, Announces Agreement By 13 Major Firms: "NEW YORK – Attorney General Eric T. Schneiderman announced that after an industry-wide investigation into mutual fund disclosures and fees, 13 major mutual fund firms—including those run by some of the largest players in the mutual fund industry—have agreed to voluntarily publish important information about their mutual funds to all retail investors."

  2. April 2017: SEC Charges Credit Suisse and Former IA Representative With Breaches of Fiduciary Duty: "The [SEC] today announced that [Credit Suisse] and one of its former investment adviser representatives have agreed to pay almost $8 million to settle charges that they improperly invested clients in more expensive “Class A” shares of mutual funds rather than less expensive “institutional” shares for which they were eligible. The SEC’s orders find that Credit Suisse and Sanford Michael Katz breached their fiduciary duties and failed to adequately disclose the conflict of interest created by such investments as they enriched themselves at their clients’ expense."

  3. September 2016: ING Bank compensates Living Super customers due to potentially misleading costs and fees statements

  4. August 2016: SEC fines Wilbur Ross firm $2.3 million over fees: “Billionaire investor Wilbur Ross' investment firm WL Ross & Co agreed on Wednesday to pay a $2.3 million fine to the Securities and Exchange Commission to settle charges that it did not properly disclose some fees it charged investors."

  5. August 2016: Apollo to Pay $52.8 Million Over Fee Practices: “A common theme in our recent enforcement actions against private-equity firms is their failure to properly disclose fees and conflicts of interest to fund investors,” said Andrew J. Ceresney, director of the SEC Enforcement Division.

  6. August 2016: Suits Target University Retirement Plans: "Many of the cases challenge 403(b) plans’ use of retail share classes of mutual funds, rather than lower-cost institutional versions of the same investments. They also contend that the plans’ arrangements with multiple record keepers cause participants to pay excessive administrative fees"

  7. August 2016: SEC Probes Silver Lake Over Fees: "Investigation is part of regulator’s broad push to make sure buyout firms are being upfront with investors"

  8. July 2016: Investors Are Getting Ripped Off on Index Fund Fees, Lawsuits Say 

  9. Feb. 2016: George K. Baum Overcharged School District, Regulator Says: “Municipal-bond underwriter George K. Baum & Co. agreed to pay a $100,000 fine over allegations it charged a school district four times the typical fee to sell debt, in part to help cover the cost of bond elections, a regulator of securities dealers said.”

  10. Jan. 2016: SEC: Alternative Fund Manager Overcharged Fees, Misled Investors 

  11. Oct. 2015:  Blackstone to pay about $39 million to settle SEC charges over fees: the payments Blackstone received "essentially reduced the value of the portfolio companies prior to sale, to the detriment of the funds and their investors."

  12. Sept. 2015: CalPERS: Tensions rise over private equity fees

  13. Aug. 2015: Private equity industry sees more federal regulation: OICE...examiners had turned up widespread "deficiencies" in how private equity firms charge clients for fees and expenses and the agency had found "violations of law or material weaknesses in controls over 50% of the time."

  14. June 2015: Earlier this year, a senior executive of the California Public Employees’ Retirement System, the country’s biggest state pension fund, made a surprising statement: The fund did not know what it was paying some of its Wall Street managers.

  15. April 2015: N.J. pension fund heads to investigate investment fees and bonuses to private companies.

  16. Dec. 2014: Two of the biggest private-equity firms are disclosing fees that had largely been hidden as U.S. regulators demand increased transparency from the industry.

  17. Dec. 2014: With private equity firms under the regulatory microscope, the balance of power may be shifting — at least a bit — away from fund executives and toward investors.

  18. Nov. 2014: Blackstone Group, which manages $279 billion, no longer will pocket extra consulting fees when selling or taking public companies it owns.

  19. Sept. 2014: SEC reviews completed as part of a two-year effort involving nearly 200 funds have found cases where potential investors were given only the most favorable description of past performance rather than full disclosure of winning and losing bets.

  20. July 2014: Federal regulators are looking at commissions that buyout firms receive for helping companies they control get goods and services at discount prices, as part of a stepped-up probe of private-equity fees.

  21. May 2014: The Deal’s Done. But Not the Fees: “In some instances, investors’ pockets are being picked,”

  22. May 2014: BlackRock faces lawsuits over “disproportionately large” fees.

  23. May 2014: The SEC found illegal fees or severe compliance shortfalls in more than half of the firms it examined since starting a review of the $3.5 trillion industry two years ago.

  24. April 2014: More than half of about 400 private-equity firms that SEC staff have examined have charged unjustified fees and expenses without notifying investors,

  25. March 2014: Muni Investors Getting Fleeced On Trading Costs: Investors typically pay twice as much in trading commissions for municipal bonds as they would pay for corporate bonds.