WASHINGTON -- The National Federation of Municipal Analysts is urging regulators to press issuers to give dealers and investors more time to review preliminary official statements for bond deals.
"We strongly recommend that POSs, along with other material documents, should be received by the financial community no later than one week prior to pricing," said Jeffrey M. Baker, chairman of the federation's industry practices and procedures committee, and Richard A. Ciccarone, past chairman of the panel.
Baker and Ciccarone made their remarks in a two-page letter sent Oct. 19 to Arthur Levitt Jr., chairman of the Securities and Exchange Commission; Christopher Taylor, executive director of the Municipal Securities Rulemaking Board; and Joseph Hardiman, president of the National Association of Securities Dealers. The letter was released late Friday.
"Over the past decade, many municipal issuers or their consultants have been mailing preliminary official statements to the financial community at a date very close to the actual pricing," the letter says. "This has created major problems for both the broker dealer and institutional buying firms in having sufficient time to accomplish the correct amount of due diligence prior to the underwriting and purchasing of the security."
Baker, vice president of Chase Manhattan Bank in New York City, and Ciccarone, senior vice president and director of tax-exempt fixed-in, come research at Kemper Securities Inc. in Chicago, said that there has been a heightened need for timely documents since the SEC enacted its municipal disclosure rule in 1989. Rule 15c2-12 requires underwriters of issues exceeding $1 million to obtain and review a copy of a nearly final official statement before bidding for or purchasing securities.
The rule also requires that underwriters of negotiated deals make available copies of the most recent preliminary official statement upon request by potential customers; they must do so no later than the next business day and by first class mail. The obligation continues until the final official statement is available.
"It seems to me that 15c2-12 was too vague," Ciccarone said. "It gave us no time. To be in compliance, all you need to do is have [the document] one hour prior to sale. If you are a fast reader, you're all right. But we're saying that with the number of deals currently in the marketplace and for the industry to get a reasonable opportunity to ask additional questions, we need a week prior to the date of sale."
"Unfortunately, the trend of receiving POSs and other related documents continues to deteriorate," the analysts' letter says. "This causes substantial due diligence problems, especially when some firms may desire to underwrite or purchase up to 30 to 40 deals in a given week."
The analysts said that on the competitive bidding side, it is estimated that the average preliminary official statement is received less than five days before bid and sometimes only one to two days in advance. On the negotiated side, "it is all too common to receive proper documentation only one day in advance of pricing, and many times not until after the initial pricing occurs," they said.
"This, in our opinion, provides an unfair advantage to the senior participants in such a transaction."
They said that in a 1992 survey conducted by the analysts group, about half of the respondents stated that the timeliness of preliminary official statements for both competitive and negotiated issues was either not very good or poor. "In stating this, we realize that in the public finance market, certain debt offerings must be brought very quickly to the market for a variety of reasons such as the current interest rate scenario and the need to raise cash within a relatively urgent time period," the analysts' letter says.
Regardless of the circumstances, preliminary official statements should be filed at least a week before pricing, they said.