WASHINGTON -- The Council of Development Finance Agencies is "cautiously optimistic" that the Securities and Exchange Commission's new secondary market disclosure rules will work for conduit bond financings, Tim Agnew, the group's outgoing president, said Friday.
"We just have to see now how the rules will play out" in the municipal market, Agnew, whose term as president ended Friday, said at the group's annual meeting in New Orleans.
Agnew, who is also chief executive officer of the Finance Authority of Maine, said he is pleased that the rules do not seem to require the disclosure of any new information in final official statements for primary bond offerings. SEC officials have been clear that the rules do not change existing standards that require material information to be disclosed in official statements.
Council members hope this means that if the participants of a credit-enhanced conduit financing previously decided they only needed to disclose information about the credit enhancer and not the underlying borrower, they can continue this practice under the SEC rules.
At the same time, however, Agnew said, it remains to be seen what kind of information bond lawyers and underwriters' counsel will call for in final official statements under the SEC rules.
"The concern we have is how the bond counsel and the underwriter's counsel will apply the new rules since they are untried," Agnew said.
The SEC rules use the official statement for a primary bond offering as a benchmark for a requirement calling for issuers or obligors to provide ongoing disclosure of annual financial information.
Under the rules, the issuer or obligor, unless exempted, would have to annually update the key financial and operating information that appears in the official statements for primary offerings done on or after July 3, 1995.
Amy Meltzer Starr, an attorney-adviser in the SEC's division of corporation finance, told the group on Thursday, "We're not going to tell you whose information you need to provide" in the final official statement of a primary offering.
"We're not going to second guess what you put in your final official statement," she said in a question and answer session that followed a panel discussion of the rules. She stressed that her remarks were her own personal views and not necessarily those of the SEC.
Securities laws and rules say final official statements for municipal bonds should contain whatever information is "material to the evaluation of the security," Starr said.
It is up to the participants of a conduit financing to determine what information that includes, she said.
Starr, peppered with questions about hypothetical transactions, said, however, that "the commission's historical position is that the existence of credit enhancement is not a substitute for information about the underlying obligors."
She also said, in a response to a question about proprietary information, that federal securities laws do not shield companies from having to disclose financial information just because it is proprietary.
Starr reminded the group that the rules seek to provide some flexibility by permitting issuers or obligors, in their final official statement as well as in the annual financial information that they disclose, to cross-reference other information that is on file with a repository, the Municipal Securities Rulemaking Board, or the SEC.
Both Agnew and Richard Geltman, a senior vice president with Peyser Associates Inc. who was hired by the group as a consultant on the disclosure rules, said they are pleased that the final secondary market disclosure rules addressed most of the concerns the group had about the rules the SEC proposed last March.
"I don't find anything in there that we absolutely opposed that's going to create a problem for the marketplace," Geltman told the group about the final rules. "I think we came out of this very well."
The rules bar broker-dealers from underwriting bonds as of July 3, 1995, unless they have "reasonably determined" that the issuer or obligor has agreed in writing to provide ongoing disclosure of annual financial information and notices of material events.
They also prohibit broker-dealers from recommending bonds unless they have in place by Jan. 1, 1996, the procedures and systems needed to monitor notices of material events that could affect them.
Robert Rosenberg, the group's counsel who is also a lawyer with Hawkins, Delafield & Wood in New York City, said the final rules were "a compromise" that benefited everyone in some way.
"For dealers, the new rules mean that they will now get the material and updated annual information without having to immediately review the issure's finances each time they sell a bond. For investors, the rules should mean a greatly improved availability of information and more informed recommendations from their brokers," he said.
"For issuers and bond counsel, I think the package stops the threat of SEC-style registration with its attendant costs and delays," he said. "For the SEC, the rules provide for more disclosure without its having to seek legislation in a new Congress that might have an anti-regulatory bias."
