WASHINGTON -- There should be no argument that it is a good idea to encourage bond issuers to tell investors up from whether they intend to provide continuing information to the secondary market.
But asking issuers to go one step further and tell investors flat out if they won't provide ongoing information seems like a strange idea at first.
Why should an issuer raise an obvious red flag that may make its bonds less attractive and drive up its borrowing costs?
Worse yet, giving issuers to option of saying they won't provide ongoing disclosure appears to provide an espace clause that might encourage issuers to do nothing to improve the level of disclosure.
Yet if you think carefully about the unconventional proposal unveiled by the National Federation of Municipal Analysts last week, it makes a lot of sense.
Under the voluntary model language developed by the analysts, issuers are being urged to declare in their official statements whether they will provide annual financial reports and other ongoing information or to say conclusively if they won't.
The disclosure guidelines issued by the Government Finance Officers Association last year only recommended that issuers tell investors if they will provide ongoing information -- they're silent on what issuers who choose not to provide such disclosure should do.
Despite pressure from regulators and market groups for improved continuing disclosure, very few issuers are saying in their official statements if they will provide continuing disclosure.
And without a substantial improvement in continuing disclosure, market participants fear there will be a new drive to further regulate the market.
That's why the analysts' proposal is important and makes a lot of sense. It will force issuers to make their intentions known to investors -- one way or the other.
If issuers intend to provide continuing disclosure, investors will know it up fron and can make their investment decisions accordingly. If issuers refuse to pledge to make ongoing disclosures, that will send a clear message to investors to be wary.
The analysts' proposal, which was subsequently supported by the Public Securities Association, also sends a message to the market that it should price bonds differently depending upon whether the issuer pledges to make ongoing disclosure available.
If issuers refuse to pledge to make continuing disclosure or try to avoid making a commitment either way, they should be forced to pay higher borrowing costs.
Faced with that unpleasant possibility, issuers will have a strong incentive to join the push for better continuing disclosure.
The analysts' plan should go a long way toward spurring better ongoing disclosure and should be supported by other market participants.
