CHICAGO -- Bond lawyers must "get with the program" and do more to promote secondary market disclosure and good practices involving political contributions, said Paul Maco, an attorney-adviser at the Securities and Exchange Commission who specializes in municipal securities.
Maco's call to action, which was made in a keynote speech on securities law issues, came after lawyers attending the National Association of Bond Lawyers' annual workshop here indicated that they could be doing more to promote voluntary secondary market disclosure and disclosure of their political contributions.
Many of the lawyers attending the workshop's disclosure sessions said that their issuer clients are stating in their bonds' official statements that they are not going to provide secondary market disclosure of information to investors unless the Securities and Exchange Commission requires them to do so.
The SEC is expected to take action later this year on a rule proposed last March that would bar dealers from buying or selling bonds unless the issuer had pledged in writing to provide financial information and notices of material events to a nationally recognized repository.
However, the SEC's legal interpretation of market participants' disclosure obligations under existing federal antifraud laws, which the commission also issued in March, calls for issuers to disclose whether or not they plan to provide secondary market disclosure to investors.
SEC officials have been urging the bond lawyers group to encourage issuers and other market participants to voluntarily commit to providing secondary market disclosure of information to investors.
However, some of the lawyers at the workshop said they are counseling issuers not to agree to provide secondary market disclosure until and unless the SEC adopts its proposed rule and spells out the requirements in more detail.
At the same time, it was revealed during a NABL board meeting here Wednesday night that.very few bond counsel firms have considered adopting an association policy statement on political contributions that the board approved last March.
The so-called "Statement of Professional Principles" calls for bond counsel firms to voluntarily disclose their political contributions according to state or local laws or in annual statements filed with state or federal repositories.
Board members said they know of only one firm -- Friday, Eldredge & Clark in Little Rock -- that has adopted the policy statement. In addition, they said, only about half the firms of the association's board members are currently considering the policy statement.
In his speech at the meeting, Maco told the lawyers that the municipal bond market is changing and that they need to keep pace with that change. Maco stressed that these were his remarks and not those of the SEC.
Maco said the Municipal Securities Rulemaking Board is undertaking a pilot program to encourage greater dissemination of pricing information.
He suggested that as more pricing information becomes available, trading in the secondary market will increase and there will be more need for secondary market disclosure.
Many market participants have already taken steps to voluntarily provide secondary market disclosure, he said.
South Carolina, for example, recently enacted legislation requiring issuers and trustees to agree in bond indentures to file an annual independent audit information with a central repository.
Tennessee, he said, recently enacted legislation authorizing the adoption of rules to facilitate secondary market disclosure by any public entity, including the form and content of that disclosure, he said.
Maco reminded the lawyers that, under the SEC's legal interpretation, issuers' "communications with investors do not stop with the release of the final official statement." The release also makes clear that broker-dealers may need to obtain additional information from issuers before recommending bonds, he said.
Maco stressed that the SEC's legal interpretation and proposed rule "are intended to be reasonable." He suggested that, if they are read carefully "much of the hyperbole that has existed in the debate" over them should "evaporate."
Maco also emphasized that when the SEC's interpretative release mentioned the issuer and analyst disclosure initiatives and guidelines that have been put forth, it was recommending voluntary adoption of them. "Voluntary guidelines remain just that -- voluntary guidelines," he said.
On another issue, Maco advised the lawyers to be careful, as derivatives and other new innovative municipal products are developed, to make sure those products are exempt from the SEC's registration requirements. The SEC is not permitted under federal law to require registration of tax-exempt bonds, but it is not clear whether some of the new products fall into that category.
Meanwhile, John J. Cross 3d, a lawyer with Hawkins, Delafield & Wood in Washington and a former-Internal Revenue Service official, called on the Treasury and the IRS to propose private-activity bond rules later this year that "provide brighter lines" on what constitutes private use of bond proceeds.
He said also that the rules should "provide maximum flexibility" with regard to mixed-use, bond-financed facilities that are used by both private and public parties because "there is no abuse here."
In addition, he said, the IRS should give market participants "a healthy dose of safe harbors," or rules under which they will not run into trouble in charge-of-use situations. In such situations, private rather than public parties take over the use of a bond-financed facility.
The IRS rules are expected to clarify when bonds involve enough private use and private payments of debt service that they become private-activity bonds that could be taxable, if they are not used to finance specific types of "exempt facilities" that are listed in the tax code.
Cross also called on the Treasury and the .IRS to adopt "a clearer reissuance standard" in reissuance rules to be issued later this year. The rules are expected to clarify when changes to the terms of bonds causes them to be reissued so that they are subject to the latest tax law restrictions.
Turning to derivatives, Cross said that "a strong case can be made" for the development and adoption of a "uniform tax vehicle" that will allow tax-exempt bonds to be securitized in the secondary market. In such a structure, tax-exempt bonds could be pooled and their cash flows sliced and diced and tailored to investors' needs.
Cross said that one of the biggest challenges facing the tax system and particularly the tax-exempt bond market is how to simplify the "staggering complexity" of the tax laws. "Federal revenue constraints have made even the most modest tax simplifications very difficult to enact," he said.
Noting that legislative proposals for tax simplification have died in each of the last four years in Congress, Cross said, "I believe that former IRS commissioner Shirley Peterson may well be right in suggesting that we toss out the tax code and start over."
