Groups urge SEC bar underwriting of issues that don't have disclosure.

WASHINGTON - Responding to mounting pressure from regulators, 12 key industry groups yesterday proposed that the Securities and Exchange Commission bar municipal bond dealers from underwriting the bonds of issuers who do not pledge to provide ongoing disclosure.

The groups also proposed, with respect to outstanding bonds, that dealers be required to disclose to investors "any information in their possession" about whether the issuer has committed to provide ongoing information. Dealers also should be required to disclose whether a bond is rated and to disclose the rating, said the groups representing issuers, dealers, analysts, and bond lawyers.

The recommendations are part of an eight-page joint statement on improvements in secondary market disclosure that were delivered to SEC officials Monday by the 12 groups and released to the press yesterday. The groups are urging that the agreement, which many market participants yesterday called a landmark document, be implemented within 18 to 24 months.

The groups that signed the agreement are: the American Bankers Association's corporate trust committee; the American Public Power Association; the Association of Local Housing Finance Agencies; the Council of Infrastructure Financing Authorities; the Government Finance Officers Association; the National Association of Bond Lawyers; the National Association of Counties; the National Association of State Auditors, Comptrollers and Treasurers; the National Association of State Treasurers; the National Council of State Housing Agencies; the National Federation of Municipal Analysts; and the Public Securities Association.

The recommendations follow a warning delivered by SEC chairman Arthur Levitt Jr. in October that market groups have until January 1994 to reach a consensus on a plan for improving ongoing disclosure before regulators step in with their own standards.

SEC officials have made clear that they will issue a written interpretation that makes clear that the federal antifraud statutes require issuers to make certain minimum disclosures to the secondary market.

They also have said that they may propose a dealer conduct rule that would bar dealers from recommending bonds to customers if the issuer has not pledged to provide ongoing disclosure.

The 12 groups did not agree with the SEC's plan for a dealer conduct rule. They said that instead of barring dealers from selling the bonds of issuers who do not pledge disclosure, the agency should bar dealers from underwriting such bonds.

Initial signals from regulators yesterday suggested they may agree with such a plan.

"The chairman's reaction is very positive," a spokeswoman for Levitt said. "He called last fall for a market-sponsored solution to municipal disclosure issues and they came up with it within the time frame he called for. It is really a responsible effort by the municipal bond community."

"I am thrilled with these recommendations," said SEC member Richard Roberts. "I would be inclined to agree with that approach," he said, referring to the idea of barring dealers from underwriting bonds of issuers that do not pledge to provide ongoing disclosure.

The SEC is under pressure from Rep. Edward J. Markey, D-Mass., chairman of the House Energy and Commerce Committee's subcommittee on telecommunications and finance, to devise a standard for improving disclosure quickly.

An aide to Markey said in a telephone interview yesterday, "We've just received the recommendations and we are analyzing them. We're encouraged that the various groups have been able to come together on some of these issues and we're going to be closely examining what they've come up with in this release.

"We hope to consult with them and the SEC as we put together our plans for further hearings," he said. Asked whether Markey will introduce legislation, he said, "We're still examining our options."

The aide expressed concern, however, about a recommendation by the groups that issuers be allowed to send bond documents and market-sensitive notices to state-run repositories if such a library exists in their area in lieu of the Municipal Securities Rulemalking Board's national repository.

"Our members were somewhat skeptical about the notion of state repositories when we have an emerging national information infrastructure the aide said. "What remains to be seen is whether either investors, analysts, or dealers are going to be able to readily access this information."

Such a plan would be a victory for the National Association of State Auditors, Comptrollers and Treasurers, which has expressed concern about the Continuing Disclosure Information library established by the MSRB. The groups said, however, that state repositories should be required to meet specific standards spelled out in their initiative.

The groups recommended that the MSRB set up a central tracking system that could rapidly inform an investor or analyst about where an issuer's ongoing disclosure is available.

The joint statement says the SEC should bar dealers from underwriting unless the issuer agrees to "make available an annual financial report on a timely basis to one or more recognized repositories, which may include the MSRB, the [nationally recognized repositories] and a central location within the issuer's state."

The issuer also must agree to Provide other "significant information," including financial and operating data, the statement says.

The groups said in the addendum to the statement that "significant information" is information that market participants "consider of importance in making an informed investment decision. It should be a complete, accurate, and objective description of relevant factors. The determination of what information is significant for a given issuer or transaction is made by the parties at the time particular disclosure documents are prepared or events occur."

Issuers should consult guidelines published by the GFOA and the analysts' federation, the groups said. They cited four items in particular that may be appropriate: whether any nontechnical default as occurred, whether there have been draws from debt service reserve funds, whether the issuer has failed to make, a regularly scheduled payment, and whether any draws have been made on any credit enhancement.

The joint statement says that the SEC's upcoming legal interpretation "should provide general guidance and illustrations without specifying the actual form and content of disclosure documents."

The groups listed seven items that might be addressed in the release, including "the desirability that comprehensive annual financial reports, independent financial audits and operating data be available to the public for all obligors."

The SEC should highlight "the importance of disclosing significant information, on a timely basis, and the appropriate means to provide such disclosure to the public." Further, it should explain the significance of the lack of such disclosure and emphasize that disclosure to the public should be informative and not confusing.

The agency should discuss the application of insider trading rules, especially in an area affected by sunshine laws and public accountability, they said. Also, the SEC should highlight the need to disclose significant relationships between an issuer and other persons that could result in the appearance of a conflict of interest or "the existence of a less than an arm's length transaction," they said.

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