WASHINGTON - State bond banks and bond pools could be crippled by the Securities and Exchange Commission's proposed secondary market disclosure standards, the Council of Infrastructure Financing Authorities said Friday.
The council, which represents state and local agencies that issue bonds to finance public environmental projects, urged groups representing major municipal market participants to press the SEC to revise its disclosure proposals.
"Several important changes need to be made to the approach to secondary market disclosure taken by the SEC in its March 9 proposed rule and announced interpretive release," the Council of Infrastructure Financing Authorities said in a seven-page letter addressed to the Government Finance Officers Association.
"These changes are essential to avoid imposing crippling administrative and financial burdens on the state financing authorities which constitute CIFA's membership," said the letter, which was signed by Terry Agriss, council president, and Alan Anders, chairman of the authority's committee on secondary market disclosure.
Agriss and Anders sent the letter to Catherine Spain, executive director of the finance officers' group, because Spain is spearheading an effort to develop a joint set of comments from 12 major market groups to the SEC on its rule and interpretive release. Spain initially asked groups to get their draft comments to her by April 25, but the deadline has slipped. The council is one of the first to forward its comments to the association. Comments on the proposals are due at the SEC by July 15.
The SEC's rule would bar dealers from underwriting bonds unless the issuer has pledged in writing to provide ongoing disclosure to a nationally recognized repository. Issuers would have to provide annual audited financial statements at least once a year, for instance. And dealers would have to review the information that issuers have pledged to provide before they recommend to their secondary market customers that they buy or sell bonds.
The proposed rule would require issuers of pooled financings to provide financial and operating information on "significant obligors" in the final official statement and in annual financial information. An obligor is viewed as significant if it is the source of 20% or more of the cash flow servicing a municipal security.
The council said it is grateful that the SEC proposed exempting those borrowers that provide less than 20% of the cash flow in a pool, but it said the commission did not go far enough.
"We feel strongly that secondary market disclosure on obligors constituting 20% or more of repayment obligations should be required only if the issuing authority has decided that disclosure on such obligors is material in its primary market disclosure," the council said.
In addition, those borrowing less than $5 million should be exempt from the rule even though they may exceed 20% of the issuance, the council said.
The council also said that bond banks and state revolving fund issuers should not be held liable by the SEC if one of their underlying obligors fails to provide secondary market disclosure as pledged.
"If there are some changes during the year in some of the audits of the underlying credit, the issuer wouldn't necessarily know that," said James N. Smith, executive director of the authorities group in telephone interview. Issuers "don't necessarily monitor these" constantly, Smith said. The SEC seems to "imply" that the issuer is liable for the information, he said.
The council said that underwriters should not be barred from recommending sales of pooled financings because a pool participant fails to provide timely filings of material changes. "This would destroy the secondary market trading of the entire pool," it said.
"The consequences to the various pool participants of a shutdown in secondary trading is far out of proportion to the very limited benefit of secondary disclosure in a pool. It also would be tantamount to a retroactive suspension of trading of bonds issued pursuant to open indentures before the effective date of the proposed SEC rule. And it would affect many more entities than the offending municipality," the council said.
The council also warned that many small borrowers that participate in pools do not have independently audited financial statements, let alone financial statements prepared in accordance with generally accepted accounting principles.
The council said it is not ready to comment on any upcoming legislation that would require registration of conduit bonds. But it said that Congress may enact proposed amendments to the Safe Drinking Water Act that would create a new state revolving fund for drinking water facilities. "For small, closely held companies which do not have publicly traded securities, the additional cost of full SEC registration is likely to make public borrowing unaffordable and therefore undermine ... environmental cleanup," the council said.
"CIFA is also concerned that unconditional requirements for full SEC registration of private company borrowing will unnecessarily require registration of ... pooled borrowings when pool participants include both private and public obligors.
The group said that at a minimum, there should be an exemption from SEC registration for "private barrowings for public purposes through programmatically enhanced pooled financings, whether on a tax-exempt or taxable basis.
The council noted that it will take time to educate pool participants about the new rule and recommended an extensive transition period before the rule takes effect. The rule should not take full effect until one year after nationally recognized bond repositories have fully started operations and are capable of handling the expanded disclosure called for under the rule, the council said.
The council represents infrastructure financing authorities across the country that have various functions: state bond banks that finance infrastructure projects of smaller municipalities; financing vehicles for environmental bond issues supported by the state revolving funds established under the federal Clean Water Act; and conduit issuers for tax-exempt bond financings for private corporations and not-for-profit agencies.