CHICAGO -- A key securities lawyer warned yesterday that bond lawyers are gaining a reputation for obstructing efforts to improve secondary-market disclosure and said regulatory action from Washington may be needed to break the logjam.
"It is distressing to have to report that the group assembled here today is emerging in the eyes of some observers as more of a bottleneck than a modulator, more of an obstruction than a damper," said Gregory Sandomirsky, in a keynote address at the National Assocation of Bond Lawyers' three-day workshop here.
A partner with Mintz, Levin, Cohn, Feris, Glovsky and Popeo in Boston, Mr. Sandomirsky was referring to growing criticism in the market that bond lawyers are not pushing clients to pledge in bond documents to provide ongoing disclosure. Providing such disclosure exposes their clients to liability under the antifraud statutes that they would not face if they did not provide the disclosure, bond lawyers said.
The issue was highlighted last year in a dramatic speech by Securities and Exchange Commission member Edward Fleischman, who warned that strong new enforcement tools granted by Congress to regulators can be leveled at bond lawyers who do not push for quality disclosure, Mr. Sandomirsky noted.
He said the market has been hearing threats of regulation of the bond market for years, but "the moment may well have come," he said. "The presidential election season is almost upon us, and I cannot think of a better domestic issue around which the Democratic party might rally than the introduction of tough new regulation in areas where the public believes that fraud and abuse may have run rampant," he said, noting that Senate hearings were under way this week on the Salomon Brothers scandal.
Mr. Sandomirsky said lawyers are suffering from disclosure "intertia" because "we are trained to look before we leap. Why should we advise our clients to undertake voluntarily liabilities they might not otherwise have for secondary-market disclosure?"
There currently is no law requiring secondary-market disclosure, but if issuers opt to provide such disclosure, they expose themselves to liability under the antifraud statutes that they would not face if they did not provide it, bond lawyers said.
Mr. Sandomirsky said a rule may be needed from Washington that would give bond lawyers ammunition to demand that issuers provide secondary-market disclosure. A good starting point might be a requirement that issuers disclose "super-material" events -- those current events affecting issuers that the entire market would want to know promptly.
He said since the Municipal Securities Rulemaking Board and the SEC are restricted in regulating issuers, the rule could focus on underwriters. Underwriters could be barred from doing deals that do not include a "super-materiality" disclosure pledge, he said.
"Perhaps we could work with the MSRB and SEC, if they would accept our help in developing standards of liability for issuers and underwriters," he said.
He stressed that he is not calling for new legislation and added that these are his views and not necessarily those of his firm or NABL.
In other comments, Mr. Sandomirsky said a disappointing development this year has been a proposal by an American Institute for Public Accountants task force to limit the ability of underwriters to get assurances from their accountants that their official statements are complete.
"This would render 'cold comfort' letters truly freezing," Mr. Sandomirsky warned, adding that the move would be "unhelpful in the current atmosphere."
Mr. Sandomirsky said many important disclosure initiatives begun last year progressed in the past 12 months, although in some cases not as far as proponents had hoped.
He said, for instance, the SEC's tabling of the MSRB's proposed electronic secondary-market disclosure must have been a major disappointment to the board. He added, however, that the SEC strongly supported the board's legal authority to develop such a secondary-market system.
Before the system can get off the ground, he said, more analysis is needed of the myriad documents out in the market and whether they can be standardized. He said a recent study by the National Association of State Auditors, Comptrollers and Treasurers of disclosure available from four key states confirms that a national central filing system may be difficult to organize.
He suggested that, rather than a national facility, a "central switchboard" could be set up that would tell investors what ongoing disclosure is available from issuers and where exactly to get it.
He said the housing finance field has become the star of the secondary market disclosure arena with the Association of Local Housing Finance Agencies this year joining the National Council of State Housing Agencies in developing continuing disclosure formats.
Mr. Sandormirsky cited several other disclosure developments that are getting lively debate, including a call recently by bond analysis that issuers disclose one way or the other up front in bond documents whether they will provide secondary-market disclosure.
He also pointed to guidelines being developed in Florida and Texas that would restict political contributions by participants in bond deals to state officials' campaigns.
"For months now, the hot potato concerning disclosure of political contributions has been passed around among market participant," he said, noting that the states' direct approaches may be a good solution. But he added, "I wonder where this approach to disclosure leads -- are social contacts, old school ties and personal relationships next?"
He said legislation pending in Congress that would relax the Supreme Court's recent ruling in Lampf v. Gilbertson, which restricts the time investors have to bring fraud suits in bond deals, is evidence of the prevailing mood in Washington. It highlights the urgency for the municipal market to make tangible progress in its efforts at self regulation.
