There’s a growing gap between what government bondholders know and what they need to know.

In the past three years, governments have collectively filed about 88 documents disclosing a direct borrowing deal with a bank to the Municipal Securities Rulemaking Board (MSRB), the entity that presides over the $3.7 trillion municipal market. But that’s far from the actual number of direct deals governments have conducted with banks. A recent Moody’s Investors Service analysis of annual audits found more than 100 bank loans and other private financings in 2013 alone that were large enough to be considered material relative to the issuer’s resources and therefore of interest to investors.

This discrepancy isn’t illegal -- governments aren’t required to immediately disclose their financings with banks like they have to do when they get financing through selling bonds. But in the past few years, more and more governments are finding that it's sometimes simpler and cheaper to borrow directly from banks instead of paying the fees associated with the process of selling bonds in the municipal market. And that lag time in reporting is not sitting well with the MSRB, which is stepping up its calls for better transparency.

“It’s time to be more vocal,” said Lynnette Kelly, MSRB’s executive director. “The prevalence of bank loans continues to be very strong in the municipal market and with interest rates where they are, it’s likely that will continue. So I think it’s important to keep this issue elevated. It’s a little frustrating because we don’t have the direct authority to take action but hopefully the regulatory side … will get to it.”

To that end, the MSRB last month fired off a letter to the Securities and Exchange Commission, calling on the regulatory agency to add bank loans to its current rule dealing with municipal financial transactions disclosures. Noting that the SEC recently ran an initiative designed to get governments to disclose any inadvertent omissions related to their bond transactions, the rulemaking board encouraged the federal agency to broaden its focus and look at all types of disclosures. Last week, the board also issued a new notice that outlined more specific actions governments should take to disclose their dealings with banks. The SEC knows about the issue and referred to the disclosure problems around bank loans in its 2012 report on the municipal securities market. But it has yet to comment further.

Currently, governments include any dealings with banks in their annual financial reports, although a small number do use the MSRB’s online database to disclose their direct deals sooner. The online database is where issuers are required to file information regarding their initial bond sale and any subsequent financial events that could affect the bond’s value. The database, called EMMA and launched in 2008, was a huge step forward in terms of making information available in a real-time manner to investors. But bank deals, which affect a government’s overall debt load and potential financial outlook, are generally hidden to investors until months or even more than a year after the fact. It’s important information that’s not readily available.

The MSRB isn’t alone in its push for more uniform disclosure. As the industry has grown, credit ratings agencies have voiced their concerns, saying the gaps in information hurt their ability to make a full assessment of a government’s health. Over the past five years, banks have nearly doubled their municipal holdings to $425 billion in securities and loans, up from $225 billion at the end of 2009, according to a Moody's report. The practice is becoming so prevalent that muni analysts indicate it's contributed to the slower pace of new bond issuance over the same period.

The MSRB, which is charged with protecting investors, municipalities and the public interest by promoting a fair and efficient municipal market, can’t do its job it if doesn’t have all the data, said Kelly. Other than just the sheer size of a bank loan compared with a government’s overall finances, the terms of these loans can directly affect bondholders, she added. For example, some loan deals require that a bank loan be paid back first in the event that a government can’t pay all its bills on time. That means that future bondholders' investments could be less protected than they realized.

“We think we have the legal and moral authority to push for this because if we’re supposed to be protecting investors," Kelly said, "they have to have the full picture of the credit profile.”