CHICAGO - By this time next year, virtually every offering statement for large municipal bond issues will discuss the issuer's plans for providing secondary market disclosure, Richmond attorney Dean Pope told bond lawyers yesterday.
Pope, a partner with Hunton & Williams in Richmond, made the prediction in a keynote speech at the 18th Annual Bond Attorneys Workshop here.
His statement came less than 24 hours after Christopher Taylor, the executive director of the Municipal Securities Rulemaking Board, told market participants at a New York luncheon that the Securities and Exchange Commission has begun developing a new standard. The standard could lead to a new regulation requiring ongoing disclosure and the SEC wants broad market, input by January on what issuers should be required to disclose.
Pope told a packed session that he hopes the SEC does not go overboard in developing its "checklist" of what secondary market disclosure ought to look like. "I hope everyone recognizes that continuing disclosure for municipal issues cannot and should not be expected to look like that for ... companies" that are required to comply with the SEC's current disclosure standards for corporations registered with the agency, he said.
"It would be unwise and foolish to expect a political subdivision run by elected officials to behave like a reporting company, at least without a long period of adjustment," Pope said.
Nevertheless, Pope said, he realizes that new requirements on continuing disclosure are coming. "It is important that we and our state and local government clients help the regulators find the proper way to deal with this problem."
Pope said a plan the MSRB was considering would have been a "logical step." The board wanted to require dealers to alert buyers in writing at the time of a bond sale whether the issuer intends to provide secondary market disclosure and to tell investors that the lack of such disclosure could affect the price and liquidity of their bonds.
"Such a rule would still leave issuers free to decline to make continuing disclosure as long as the prospectus clearly explained that decision and its implications. The market would then be free to put its own value on continuing disclosure," Pope said.
But Taylor told the Municipal Forum of New York Wednesday that the SEC is stepping in with a tougher standard. "We played our ace. But the SEC appears to have trumped us for the time being." he said.
SEC staff members have been considering proposing a rule that would bar dealers from recommending, and possibly even selling, bonds to investors in cases where issuers do not pledge to provide ongoing disclosure.
Pope said that with or without a new SEC standard, issuers such as hospitals and retirement communities will by this time next year find it difficult, if not impossible, to sell their bonds at attractive rates if they do not agree to make continuing disclosure.
But he said most traditional municipal issuers, at least larger ones, will find that the market will be satisfied with reports that such issuers already prepare.
Pope said if rules coming out of Washington are drafted properly, they will allow a large number of infrequent issuers to continue to sell bonds with minimal continuing disclosure responsibilities.
That will not be the case, however, if regulators attempt to impose "sweeping" requirements that attempt to duplicate current standards for companies registered with the SEC, he said.
SEC Chainnan Arthur Levitt told a House subcommittee earlier this month that the commission has no intention of developing rules for municipals that are as complex as those for registered companies.
"The lazy solution to the current cry for reform will be to legislate or to write a bunch of new rules without knowing what burdens they will bring." Pope said. "The best solution is to see if vigorous enforcement of current rules and the careful use of current powers in new ways can get us along the road we need to travel. "
The sooner bond lawyers accept that and start working with their clients toward that end, "the better off we will be," Levitt said.
Meanwhile, Katherine Bateman, the president of the National Federation of Municipal Analysts, said yesterday that members of her group and the Government Finance Officers Association were briefed by the MSRB Tuesday on the board's upcoming announcement on secondary market disclosure.
Bateman also said her group's board of governors voted yesterday to play an active role in helping regulators write a standard.
She said a project already launched by the federation will help lay the ground work for regulators' efforts. It has resulted in the development of three-page secondary market formats for issuers to send to the MSRB's secondary market information repository on a sector-by-sector basis.
"I'm so pleased we were as far along as we were," Bateman said in a telephone interview yesterday. "It gives us a basis for saying to people, this is what we need,' in terms of ongoing disclosure."
Bateman said that regulators told her that the development of the list of disclosure items is the first phase in regulators' efforts. "My understanding is that in the next phase they will determine what action to take - an SEC interpretation or rule, or a rule through the MSRB" or the SEC, she said.
