LOS ANGELES - In the wake of Orange County, Calif.'s financial debacle, the Government Finance Officers Association will look at whether its disclosure guidelines need to be revised to assist investors in detecting high-risk investment tactics by issuers.
A GFOA disclosure task force will begin a review of the association's existing disclosure guidelines by March, and a draft of its recommendations will be ready by next summer, said Jeffrey S. Green, general counsel for the Port Authority of New York and New Jersey.
"One of the issues we will look at is whether any revisions are necessary because of the Orange County situation," Green, who chairs the task force, said yesterday. "We will consider that and act accordingly."
Even before Orange County's woes surfaced at the beginning of December, the association was planning to update its disclosure guidelines to reflect last month's adoption by the Securities and Exchange Commission of new secondary market disclosure rules.
The association's publication, "Disclosure Guidelines for State and Local Government Securities," is intended to be the backbone of what should be included in an official statement. The guidelines were most recently revised in January 1991.
Since 1976, the GFOA has published disclosure guidelines for official statements, as well as recommendations for continuing disclosure in the secondary market. Because issuers are told they are only a recommended approach, "in the real world, people don't use them," one market participant said. "They are a quasi-gimmick."
But, while the guidelines "are not a legal standard by any means," Green said many issuers use them "because their bond counsel or their financial advisers just tell them what to do."
If government finance officials were asked whether they follow the guidelines, some "wouldn't know what you are talking about," Green said. "But, if you look at their disclosure, it is consistent with the guidelines."
Green said he could not comment on whether Orange County followed GFOA's guidelines in the preparation of its now-notorious official statements that are at the center of the disclosure controversy.
"There is no way I can second-guess somebody else's disclosure, particularly when I haven't read it and I am not involved in that transaction," Green said.
The county has not commented on whether it used GFOA guidelines in the drafting of its official statements. However, the county has said in general that it followed the advice of bond counsel in preparing bond-offering-related indentures.
A class action lawsuit filed Friday alleges that Orange County's official statements hid the risky nature of the investment fund managed by former treasurer-tax collector Robert L. Citron.
The pool's collapse early this month because of Citron's bad interest-rate bet triggered his resignation, the country's filing for bankcruptcy, rating agency downgrades, and a Securities and Exchange Commission investigation.
The pool disaster also has spurred industry discussion on how many other intergovernmental investment funds have racked up paper losses and may be overleveraged.
John E. Petersen, president of Government Finance Group Inc. in Arlington, Va., said he would not be surprised if as many as "15 or 20" municipalities nationally eventually suffer some losses in their investment funds.
He said he believes that Orange County's problems will spur greater attention to municipalities, cash management practices in the future.
However, Jeffrey L. Esser, GFOA executive director, said Orange County's investment pool strategy is "set apart" from other intergovernmental pools.
For example, this past summer the county issued bonds for the sole purpose pose of investing proceeds in the pool. Esser said that borrowing practice, along with the pool's size and leveraging, "put Orange County in a class all by itself."
Don Beatty, a former executive director of GFOA who had a hand in drawing up the original disclosure guidelines in 1976, said "it is probably time to look seriously at direct regulation" of the municipal bond industry.
Beatty, a Bank of America vice president for institutional trust services, said at present "there is really very little incentive for issuers to do much more than they are doing currently" regarding disclosure.
The market might be better served if issuers were required to undertake "some sort of reasonable filing of information formation in a central repository so investors can go and look at the information" Beatty said.
"Disclosure is moving forward at a rather rapid rate at this particular point with the recent rulings of the SEC. and I think that [Orange County and the SEC guidelines! will push disclosure issues further," he said.
The SEC currently has little regulatory authority over tax-exempt issuers, but it does have authority over underwriters. State and local government issuers are Subject to the SEC's antifraud rules in much the same manner as corporate debt issuers.
Thus, issuers are required to ensure that all items of a material nature, both positive and negative, are adequately disclosed in the official statement.
The Tower Amendment prohibits the SEC and the Municipal Securities Rulemaking Board from adopting rules requiring municipal issuers to file registration documents before their offerings are made. The amendment was added to the Securities and Exchange Act of1934 when the MSRB was credited in 1975.
Green, the GFOA's disclosure task force chairman, said the SEC's release last month on secondary market disclosure "is consistent with many of the recommendations in the GFOA guidelines with respect to periodic disclosure." He said disclosure is always the issuer's responsibility: "They certainly can designate a bond counsel or a financial adviser to do it, but the ultimate responsibility is the issuer."
Noboody is sure how comprehensive GFOA disclosure guidelines need to be.
Petersen of Government Finance Group said it is not realistic for investors to rely on disclosure guidelines to "anticipate everything that can go wrong with a government." For example, Petersen said, Orange County's use of derivatives was not the problem - "it is rather the leveraging of the fund that caused the problems."
The leveraging strategy, which counted ed on low interest rates, ultimately backfired, and the investment pool experienced an estimated $2.02 billion in lost value. "The real question is when in fact those losses that were potentially to be experienced really became material," Petersen said.
That pool loss "would have been an item needing disclosure" to investors, he said.
Petersen, who was director of the GFOA finance research center in the mid-1970s when the association's disclosure guidelines were developed, said financial asset holdings of general governments excluding pension systems and various trust funds - are roughly $800 billion.
"We would probably need to have something on the scale of Orange County four times over for it to amount to 1% of the sector," Petersen said. "I only want to point out that the record of financial losses, including defaults, is much higher in the private sector than the public sector."
