WASHINGTON -- The Association of Local Housng Finance Agencies yesterday adopted in final form tough new guidelines for secondary-market disclosure by its members.
The local housing agency standards are the latest in a flurry of guidelines published by industry groups aimed at improving continuing disclosure. Also this wekk, bond lawyers and issuers gave guarded support to the Municipal Securities Rulemaking Board's proposed pilot program for secondary-market disclosure, in comments sent to the Securities and Exchange Commission. Bond trustees broadly backed the pilot in their comments.
The housing agency standards are considered particularly important since housing bond deals are some of the most complex and trouble in the market.
Last year, John Nuveen & Co. warned in a 160-page report that many of the local single-family mortgage bond deals its analysts had researched in the previous 15 months showed signs of trouble, but that investors were not being warned of the problems.
The guidelines recommend that issuers report annually to the market on the status of their bonds using a standardized format modeled after one released in 1990 by the National Council of State Housing Agencies for state housing offices. The NCSHA format calls for quarterly reporting, while the local housing agency task force is calling only for annual reports.
The local housing agency guidelines also outline model indenture language that issuers can use to tell their trustees to make continuous disclosure to the market through central repositories.
The standards say single-family housing issuers should have an audit and cash-flow analysis done for bond issues at least once every three years. Such analyses are viewed as an important way to detect an oncoming default in a housing deal.
The guidelines build on model indenture language issued in final form last month for secondary market reporting developed by the corporate trust committee of the American Bankers Association. Among disclosures that issuers of local housing bonds are being urged to make in indentures are draws on debt service reserve funds, unscheduled redemptions, rating changes, defeasance of outstanding bonds, and giving notice of an event of default.
The local housing group's board of directors has officially designated Bloomberg Financial Markets and Kenny Information Services as official repositories for annual reports filed by its members. "Both have agreed to accept such reports and make them available, for a modest fee, to persons requesting them," said Chuck Brass, chairman of the group's disclosure task force and director of development for the New York City Housing Development Corp. The Bond Buyer also is accepting the documents, said Debbie Heffernan, executive vice president of Securities Informations Services for the The Board Buyer.
Meanwhile, the Government Finance Officers Association said the MSRB's proposed pilot is a step in the right direction, but warned that its limited scope could result in disappointing results that may send the wrong signal to federal regulators and Capitol Hill.
The MSRB on Oct. 7 proposed an 18-month pilot program under which it would accept three-page notices of market sensitive information on paper, by facsimilie machine or electronically from market participants. For the first six months of the pilot, it would only take notices from trustees.
Jeffrey Esser, executive director of the GFOA, contended that the system will not have a substantial impact on secondary-market disclosure because many small governmental issuers do not employ trustees on their issues and the prevalent form of continuing disclosure information provided by such entities is the annual financial report, which would exceed the three-page limit established by the pilot.
But the MSRB says that while it would not provide copies of longer documents such as annual reports, it would announce the availability of such documents and tell market participants how to get them from the issuers. Mr. Esser, however, said issuers will be more likely to use private repositories to distribute their documents because the private repositories will bear the expense of fulfilling information requests.
The GFOA says a request for financial information is more likely to be fulfilled in an expeditious manner by a private repository that an individual government.
"We would caution that if the voluntary pilot system created by the MSRB is underutilized, it should not be taken to mean that secondary-market disclosure is inadequate or is not improving," Mr. Esser said. "It also would be inappropriate to use such information to justify further federal regulation of the disclosure process."
The GFOA said what is most needed to improve secondary-market disclosure is a standard format which issuers can use that "meets the needs of investors and is understood and used by issuers." Before the board launches the pilot, it should fund an industry-wide project coordinated by the GFOA aimed at coming up with such a document, Mr. Esser said.
In other comments, the American Bankers Association applauded the board's decistion to accept notices on paper and via facsimile, in addition to electronically. The group, which has been a strong advocate of a central repository operated by the MSRB, had warned in earlier comments that it would be too costly for some smaller banks to file disclosure information electronically.
The association said the board's system is of "vital concern" to its membership, noting that over 1,800 banks and trust companies serve as corporate trustees for 115,000 different issues with a total dollar value outstanding in excess of $1.9 trillion.
John Gardner, chairman of National Association of Bond Lawyers' committee on securities law and disclosure, said the jury is still out on whether there will be enough demand for the board's system, but said it is an "important first step" in improving secondary-market disclosure.
Bond lawyers have been criticized for not pushing their issuer clients to provide secondary-market disclosure. Some lawyers worry that, for a variety of reasons, such disclosure exposes clients to too much legal liability, particularly if the information is disclosed unequally to the market or if it contains errors.
The NABL will soon look the issue squarely in the face as it begins to rewrite its 1987 recommendations for disclosure for bond lawyers. Mr. Gardner said the secondary-market disclosure question will be one of the issues addressed in the rewrite.
In its comments to the SEC, the group said the three-page limit is unduly restrictive; that it should accept amendments to official statements; and that it is worried that dissemination of information submitted by facsimile or mail will lag behind electronic filings in an unacceptable amount.
The group expressed disappointment that the board did not use an industry-wide advisory group set up to help with decision-making on MSIL in formulating the pilot. And it urged the SEC to open the pilot up again for industrywide comment again at the end of the 18-month trial period.
