WASHINGTON -- The chairman of the Senate Small Business Committee is warning the Securities and Exchange Commission that its proposed municipal disclosure rule will undermine Congress' recent efforts to assist the growth of small companies.
Sen. Dale Bumpers, D-Ark., who backed Congress' decision last year to permanently extend the tax-exempt status of small-issue industrial development bonds, also is urging the SEC to consider exempting such firms from the proposed disclosure rule.
"As chairman of the Senate Small Business Committee, I have fought this battle long and hard," Bumpers said in a two-page letter to the SEC.
"Please do not let our recent efforts to assist small companies through the IDB program, or our desire to reduce excessive paperwork, be undermined through burdensome and unnecessary regulation," he said in comments on the rule, which the SEC on March 9 voted to propose.
Comments on both the rule and a legal interpretation of the disclosure obligations of issuers and dealers, which appeared in the March 17 Federal Register, are due Friday.
The rule would bar dealers from underwriting bonds unless the issuer has pledged in writing to provide ongoing disclosure to a repository. Issuers would have to provide annual audited financial statements at least once a year and pertinent operating information to the marketplace.
Dealers also would be required to review the information that issuers have pledged to provide before they recommend to customers that they buy or sell bonds under the rule, which is drawing a steady stream of comment letters from issuers, dealers, bond lawyers, information vendors and regulators. Comments, which are expected to total in the hundreds, are due Friday.
"Small companies are the driving force of the nation's competitiveness, and we should do everything possible to help them succeed," said Bumpers, saying that the "cost of compliance for small companies will be steep."
He questioned whether the rule is needed since many small conduit borrowers are backed by credit enhancements.
The concerns are shared by Arkansas' other senator, Democrat David Pryor, who also sent a comment letter on the issue to the SEC.
"In Arkansas, small-issue IDBs have helped small manufacturers generate thousands of jobs and preserve hundreds more. I fear that imposing secondary market disclosure requirements on conduit borrowers with credit enhancement could negatively impact" that growth, Pryor said.
The Council of Development Finance Agencies, which represents more than 100 public agencies that issue small-issue IDBs nationwide, told the SEC that small manufacturers will stop using IDBs to finance projects if they are required to provide ongoing disclosure to investors.
Small manufacturers usually do not produce an annual report or audited financial statements, the group said in an eight-page letter. Also, because they are frequently sole proprietorships, partnerships, or closely held corporations, these firms are extremely reluctant to publicly release proprietary, financial, and project information, the group said.
The council is recommending a series of exemptions from the rule for small IDB issuers.
The Government Finance Officers Association, meanwhile, alerted the SEC that it and 11 other groups will file a joint comment letter on the proposals, but it will be slightly late.
The delay will come because the group will not meet until July 18 or 19 to put final touches on the letter, said Catherine Spain, director of the association's federal liaison center in Washington. The association has asked group members not to file their individual comments on the proposed rules until after the joint meeting, Spain said.
A "joint statement" filed by the finance officers group last December served as a model for the SEC's March 9 proposals.
The Government Accounting Standards Board, meanwhile, sent a comment letter that applauds the SEC's legal interpretation for encouraging state and local government issuers to use generally accepted accounting principles when preparing their financial reports.
But the board, which was created in 1984 to set financial accounting and reporting standards for state and local governments, said that it is concerned about the "apparent prescriptive nature" of the form and content of the proposed disclosure documents.
"To require such disclosures would be tantamount to the SEC establishing governmental GAAP," said the board's chairman, James Antonio. "The GASB is the recognized standards setter for governmental GAAP -- and that came only after years of careful negotiation among various state and local government officials and professional organizations."
For instance, Antonio said, the SEC has ruled that audited financial statements fairly present the issuer's financial condition, its results of operations, and cash flows. Also, he said, the interpretive release would require issuers to discuss their exposure to market risk from derivative products and the strategies they use to alter those risks.
Dozens of Arkansas counties and towns also recently filed comment letters with the SEC saying they are anxious about the proposed time frame by which issuers must release financial statements under the SEC's proposed rule.
The rule would bar firms from underwriting bonds unless an issuer has pledged to provide, at least annually, audited financial statements and other "pertinent operating information."
The commission's interpretive release also would require issuers to release annual financial statements as soon as possible and to complete their financial statements within six months after the end of the fiscal year.
But Louise O. Berry, mayor of Eureka Springs, Ark., said in a letter that was typical of many received from Arkansas that her state's audit division does not complete its audit of the town's finances until 12 to 18 months after the end of the fiscal year. "The cost of acquiring the services of a private accounting firms [to complete audits earlier] would create budgetary concerns for our local government," Berry said.
