WASHINGTON -- Ten international banks are warning the Securities and Exchange Commission that they may stop providing letters of credit to issuers if they are pressured by the municipal market to provide added disclosure under the commission's recent legal interpretation.
"If additional disclosure requirements are imposed on banks, it is very possible that, as a result of the increased costs and complexity of compliance, many banks, particularly non-United States banks, may be forced to exit the market for municipal securities enhancement," Peter C. Kornman, a partner with Davis Polk & Wardwell in New York City, told the SEC in a six-page comment letter.
Kornman, who was writing on behalf of 10 major banks worldwide, said that while the U.S. municipal securities business is an important source of business for such banks, the costs of revising worldwide financial reporting and disclosure practices could outweigh the benefits.
His warning is a response to the 39-page legal interpretation that was published by the SEC March 16. The legal interpretation reminds issuers that their disclosure documents are subject to the SEC's rule barring material misrepresentations and omissions and points to areas that need improvement. The release lists 11 items, at a minimum, that should be disclosed quickly to the market where material.
Of particular interest to banks and insurers is a section of the interpretive release that says that good disclosure includes information about the provider of a letter of credit or other enhancement as well as information about the terms of the enhancement.
The Government Finance Officers Association recommends in its own voluntary disclosure guidelines that official statements include information about the assets, revenues, reserves, and result of operations of credit enhancers, the SEC's release notes. Issuers should consider the size and duration of the enhancement and the income and cash flows of the issuer or obligor when deciding how much disclosure to make, the SEC said in the legal interpretation. Comments were due on the interpretation and a proposed rule on disclosure July 15.
Kornman was writing on behalf of banks that issued more than 40% of the letters of credit provided by banks during 1993 for newly issued municipal securities. Bank representatives are scheduled to meet with SEC officials Aug. 10 to discuss their concerns.
The banks that signed the comment letter are Credit Local de France; Credit Suisse; Dresdner Bank AG; Morgan Guaranty Trust Company of New York; National Westminster Bank PLC; The Sanwa Bank, Ltd.; Swiss Bank Corp.; The Sumitomo Bank Ltd.; Toronto Dominion Bank; and Union Bank of Switzerland.
Currently, banks generally provide several paragraphs of very brief financial information in the appendix of the official statement, and most banks agree to provide the most recent annual report to anyone who wants it without charge.
But banks are concerned that the market will interpret the SEC's disclosure guidelines as requiring them to update their financial information every time they issue an LOC for a new offering, which is often several times a month, industry sources said. Banks also are not in a position to send notices immediately to bond repositories of every material change on the SEC's recommended list of 11 pieces of market-sensitive information, they said.
"Look at the California official statement the other day," said one knowledgeable market participant, who was referring to California's issuance of $4 billion of revenue anticipation warrants July 26. "Can you imagine if California had to sit and wait at the printer to call 14 banks around the world to see if there had been a material change.
"While the American public finance system is important to these banks, they will not let it control their worldwide financial reporting and disclosure practices," the market participant said.
The banks' letter notes that most of the municipal securities enhanced by banks are either variable-rate demand notes or short-term notes. Such securities can either be tendered at par on short notice or have a short maturity, they said. "Therefore, the risk of default is negligible, as is the risk of the loss of value in secondary market trading."
"The banks request that the SEC state that, while appropriate financial and other information regarding municipal credit facilities be made available to potential investors, the scope, timing, and frequency of such disclosure does not need to be changed from that which exists today," the letter said.
