WASHINGTON -- When the City of Eden Prairie, Minn., went to market recently with $10 million of bonds to build the Tanager Creek multifamily housing project, it decided to require the most up-to-date secondary-market disclosure possible.
The bond issue includes a continuing disclosure agreement under which the project developer and credit enhancer agree to provide regular financial reports to the bond trustee, according to the bond counsel for the deal, John Utley, of the law firm of Mackall, Crounse & Moore in Minneapolis. The trustee will then supply them promptly to both bondholders and nationally recognized repositories.
Similarly, any important ongoing events that affect the project are to be reported to the bondholders and to the repositories, he said.
But the Eden Prairie deal is one in a million. Most bond deals that have gone to market this year have not pledged to provide ongoing disclosure to the market despite a myriad of guidelines from key market groups on how to do it.
The lack of disclosure is no accident or mere oversight. It reflects a heated debate in the municipal bond market that deeply divides key groups and has resulted in only a sluggish response to the municipal market's push for secondary disclosure.
The key issue is whether issuers are willing to stick their necks out and pledge to provide ongoing secondary-market disclosure when, unlike the equities market, there is no regulatory requirement to do so. Disclosure can be risky. If an issuer chooses to do it and the material turns out to be inaccurate or incomplete, it can get slapped with a lawsuit.
Also, issuers are under little market pressure to provide vastly improved disclosure, since deals that pledge ongoing disclosure generally are still not selling at a premium.
Nowhere was the issue more clear than at the National Association of Bond Lawyers' annual workshop in Chicago last week, where attorneys warned that it may be time for the secondary-market disclosure movement to get a short in the arm -- possibly from federal regulators. Without federal pressure, t could be months or years before the movement gets off the ground, they said.
"It certainly hasn't caught fire," said Paul Maco, a key member of the and a partner with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo in Boston.
"It may develop. It could very well be a classic chicken-and-egg situation where issuers are thinking, 'Yeah, we'll do it if you make it worth our while by chopping off a few basis points on our bonds' and the market is thinking, 'Well, we'll think about doing that when we see what it is you are going to give us,'" he said.
Mr. Maco says what is needed is a blue-ribbon panel study that will pinpoint where the heaviest trading is occurring in the secondary market, and thus highlight where secondary-market disclosure standards should be focused.
"Someone really needs to separate myth from reality," he said. "Without a study, I don't hink any rule would be well founded. And I don't think it would necessarily lead to a rule," he said. "Issuers whose securities trade frequently may decide this really is worth my while to do and buyers may be more inclined to be insistent based purely on a greater degree of information," Mr. Maco said.
Gregory Sandomirsky, who is also a Mintz, Levin partner, warned in a keynote address at the Chicago conference that bond lawyers are gaining reputations as "bottlenecks" to disclosure for not pushing clients more to make ongoing disclosure pledges. He reminded them of the dramatic remarks last year of 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.
But Mr. Sandomirski said a rule may be needed from Washington that would give lawyers the leverage they need to start demanding that issuers provide secondary-market disclosure. The Municipal Securities Rulemaking Board could bar underwriters from doing deals that do not provide for the disclosure of "super material" events by the issuer -- those current events that the entire market would want to know promplty, he said. But the board would have to put the requirement in the lap of underwriters because the Tower Amendment bars it from directly regulating disclosure of issuers.
