CHICAGO -- A Public Securities Association official said yesterday that the group is working on secondary market disclosure recommendations to present to the Securities and Exchange Commission in January.
R. Fenn Putman, vice president of the association, said in a telephone interview that the association is drafting the recommendations with the input of major market participants at the request of the SEC.
SEC officials have said that they may issue a written interpretation stating that federal antifraud statutes require issuers to make certain minimum disclosures to the secondary market.
Putman said that the association's preliminary proposal will recommend that an issuer disclose that its annual reports are available to the market via a notice on some central information network such as the Municipal Securities Rulemaking board's continuing disclosure pilot, CDI. The report then could be inputed into the board's on-line Municipal Securities Information Library where official statements are currently stored.
Putman said that the association also will recommend that the issuer disclose a breach of any of the 16 pieces of information that the American Bankers Association listed as important points for disclosure in guidelines that the group drafted 1990. A revised version of the guidelines were eventually approved by the association, but the list was pared down considerably.
The original guidelines called for disclosure of such items as any draws from debt service reserve funds or credit enhancements, any failure to perform by a third party guarantor, any bond counsel opinion dealing with an adverse impact on the tax exempt status of bonds, notices regarding mandatory puts or remarketing of securities, and notices of defeasance.
Putman outlined the preliminary recommendations on Saturday at a conference sponsored by the State Debt Management Network in Overland Park, Kan.
"We are at a critical crossroads," Putman said. "I think we have an opportunity to work together for all participants -- the issuers, the lawyers, and the New York community -- to come up with a fairly straightforward uncomplicated lowest-cost-possible solution," Putman said at the conference.
Putman said that implementation of the association's proposal would lay the groundwork for more in-depth disclosure in the future.
"Over time, we would hope we get some of these trinkets we'd like to hang on this Christmas tree: [generally accepted accounting procedures], statistical reports, annual budgets, whatever else analysts need or would like to have," Putman said.
When an audience member addressed the issue of how much implementation of the disclosure guidelines will cost issuers, Putman said the investment will be worth it.
"I think there is some cost to it, but I think our concept is to make the cost as little as possible," Putman said. "The real cost here is that if we don't [implement disclosure rules], the market becomes very inefficient and everybody suffers from it. And that cost is enormous."
Putman said that the SEC has noted that it does not have the power to enforce disclosure. However, he said that the SEC could seek the passage of legislation giving the agency that authority.
"While Congress is not going to come down on their local issuers, I would suggest that if Mom and Pop have been injured in the marketplace, because of a perceived lack of disclosure, they will get through [Rep. Edward J.] Markey and others to pass legislation to enforce that," Putman said.
Putman said that he believes the secondary market disclosure issue will become greatly accelerated by the "Group of 30," which is an international effort to streamline clearance and settlement of stocks and bonds.
"My guess is that by the end of the century, we will have trade day plus one settlement," he said. "What this says is the dealer community will have little or no time to get information to the investor and vice versa. It will compress the ability and need to get information."
Some state finance and municipal industry professionals said that secondary market disclosure could place a financial burden on issuers, especially conduit finance agencies that issue housing or health care bonds.
One investment banker said that if stringent disclosure measures are adopted, he could envision some issuers refusing to issue those types of bonds, with the burden shifting to state agencies.
Ann V. Butterworth, chairwoman of the State Debt Management Network, challenged SEC Chairman Arthur Levitt, who has said that if local governments cannot afford secondary market disclosure they shouldn't be in the market.
"I would strongly disagree with [Levitt]. The very governments that need to be in the market are those that do not have the ability to access on a current basis revenues sufficient to cover their expenditures. Those are the governments that do not have the abiltiy to access a wide range of taxes," Butterworth said.
She added that the market should be to assist local governments in accessing the marketplace.
"If what we're saying is that the reason why we're having a central location [for disclosure] so that municipal analysts can provide their investors in a more timely basis their analysis, to me that is the wrong focus," Butterworth said.
