WASHINGTON -- Issuers and other market participants must-not lower their standards for disclosing information in official statements as a result of the new secondary market disclosure rules, the SEC warned Friday.
"The fact that the [rules] rely on the final official statement to set the standard for ongoing disclosure should not serve as an incentive for issuers to reduce existing disclosure practices in the preparation of the final official statement," the Securities and Exchange Commission said in a release explaining the rules, which it adopted Thursday.
"Market discipline and regulatory requirements should ensure that those practices continue at current or improved levels," the SEC said in the release.
The commission noted that several market groups have voluntarily developed good practices for disclosing information in official statements and said that it "anticipates that such sound practices will continue and develop beyond that mandated by the [rules] ."
The rules use the official statement as a benchmark standard for secondary market disclosure. Issuers or obligors would have to annually update the official statements from their primary offerings to help satisfy an annual financial information provision of the rules.
The rules contain two major requirements. One would bar dealers from underwriting bonds, as of July 3, 1995, unless they had "reasonably determined" that an issuer or an obligor had agreed in writing to provide annual financial information and notices of material events to various repositories.
To satisfy the annual financial information provision, issuers or other market participants would have to annually update key information in official statements. Issuers would have to send audited financial statements, if and when they are prepared, to repositories. They would also have to disclose material events. The rules list 11 potential problems or occurences that could constitute material events.
The other major requirement calls for broker-dealers to have in place by Jan. 1, 1996, the systems and procedures to monitor material events that could affect the bonds they recommend to investors.
Broker-dealers would then have to take into account existing Municipal Securities Rulemaking Board rules and securities laws to determine what information to disclose to investors when making the recommendations.
The SEC release said that, with regard to the first requirement, the ongoing disclosure agreement, or undertaking as it is called, can be provided by "any issuer of the municipal securities being offered, or by any obligated person for which information is provided in the final official statement.
"It will not be necessary to obtain an undertaking from all possible issuers or obligated persons," the release said.
The agreement to provide ongoing disclosure can be included in the trust indenture, a bond resolution, a separate document, or, in a competitive bid offering, a notice of sale, the release said.
The issuer or obligor must describe the agreement in the final official statement and identify the parties for which information will be disclosed and the type of information to be provided, the release said.
"By reviewing the final official statement, investors in the secondary market will be able to ascertain the scope of the undertaking and whether it has been satisfied," the SEC said in the release.
Any failure to meet the agreement to provide ongoing disclosure must be disclosed in subsequent official statements over a five-year period and in a material event notice, the release said.
The rules do not prohibit broker-dealers from underwriting bonds if an issuer or obligor fails to comply with the agreement.
However, the SEC said in the release, "it is doubtful whether an ... underwriter could form a reasonable basis for relying on the accuracy of the issuer's or obligated person's ongoing disclosure representations" in such cases.
The release said that participants of a bond offering may determine the parties for which financial and other information must be disclosed on an ongoing basis. These parties may include the issuer, obligor, or other market participants, the release said.
At the same time, however, final official statements must include "financial information and operating data ... for those persons, entities, enterprises, funds, and accounts that are material to an evaluation of the offering," the release said.
In earlier proposed rules, the SEC had a controversial provision calling for issuers to provide information about "significant obligors" that were the source of 20% or more of the cash-flow needs of the bonds.
The final rules eliminate the concept of significant obligors. Instead, the release said, financial information must be disclosed with regard to "obligated persons" that are "committed by contract or other arrangement structured to support payment of all or part of the obligations on the municipal securities."
An obligated person could include an issuer of separate securities, the release said.
The SEC said it has tried to be flexible with regard to pools. Market participants of pooled financings must describe, in their official statements and agreements for ongoing disclosure, the criteria they use to determine who the obligated persons are in their financings. They must then must apply that criteria on a consistent basis, the release said.
The release said issuers and obligors are permitted, but not required, to provide information, or a reference to where information can be obtained, about those providing credit enhancement for their financings.
At the same time, however, the release said the commission "encourages industry participants to work together to adopt appropriate primary and secondary market disclosure practices with regard to credit enhancement providers.
The SEC said it "will monitor developments in this area regarding the nature and quality of information made available about credit enhancers and liquidity providers, and the manner in which information is made available to determine whether further steps are necessary to assure access to this important body of information."
The SEC clarified in the release that the rules do not require political statements to be provided to repositories. The interpretative release about market participants disclosure obligations that the SEC last March merely stated that such statements, in some cases when directed at investors and the market, could materially affect bond issues, the SEC said in a footnote in the release.
Notices of material events must be provided "on a timely basis," the release said. But the SEC does not elaborate on what would be timely.
Events affecting the tax-exempt status of bonds may be material, the SEC said. Such events could include "the commencement of litigation and other legal proceedings, including an audit by the Internal Revenue Service, when an issuer determines, based on the status of the proceedings and their likely impact on holders of the municipal securities, among other things, that such events may be material to investors," the release said.
The SEC said that, with regard to the requirement that broker-dealers have systems and procedures to monitor material events, "dealers should develop procedures to ensure that notices of such events will be available to the staff' who recommend bonds.
The release lists several criteria that organizations must meet to become nationally recognized municipal securities information repositories, or NRMSIRS, including the stipulation that they maintain annual financial information as well as official statements and notices of material events.
The SEC release said it "encourages states to develop state-based depositories" to collect such information.
