State and local government issuers have said for years that they do not want Washington to dictate the form and content of the information they release to the municipal bond market. But now that the Securities and Exchange Commission is turning up the heat for better disclosure, suddenly many issuers and other market participants are hungry for more guidance.
"The details are absolutely critical," said Virginia B. Rutledge, chief financial officer of the Orlando Utilities Commission. "Exactly what is a significant event [that should be disclosed] is not as well defined as we would like."
"The more specificity the better," said Steven Juarez, executive director of the California Debt Advisory Commission in Sacramento, summing up early findings from a survey of localities in the state.
"If you are going to require this indirectly of issuers, be very specific as to what you want," Juarez said. "If you leave it open ended, then you are going to get [uneven] compliance. It's unfair to those issuers who do comply."
Juarez stressed that his conclusions are preliminary and may not jibe with those that California Treasurer Kathleen Brown will file July 15, when the SEC requires comments on its legal interpretation and proposed rule on disclosure.
Complaints about lack of guidance are being heard across the country. "If a major plant closes, is that material?" said Ronald W. Langness, managing principal at Springsted Inc., in St. Paul, the financial adviser to hundreds of municipalities in the region. "Say Disney just announced it's going to open a place in Virginia. How do you determine if that's good or bad?
"To leave all those types of things in the hands of some poor municipal official is impossible. You are putting liability on him that he is no way able to cope with," said Langness, who contends that the SEC's proposed disclosure rule is "overkill."
"We recently did our first wire through the Municipal Securities Rulemaking Board's" repository, said Phillip Allen, director of finance and administrative services for Broward County, Fla. "It advised that we have filed copies of the county's annual financial report to nationally recognized repositories.
"The next question becomes how much do you say on the wire? Do you just say here is our statement and here" is where an investor can get it? he asked.
"Or do you say our earnings per share were" such and such, and go into lots of other detail? Allen asked. Do you need to recap the contents of the report? Or are you limited to just stating here is the report? he said.
"We're an electric utility," Rutledge said. "If [we] lost a great customer in the middle of the year, do we need to tell the repositories? Some of these things hopefully will be better defined. We will make this work. But we want to make sure we explicitly understand the rules."
The SEC began its disclosure drive on March 9 issuing a proposed rule and a legal interpretation for comment.
Provisions of the rule would bar dealers from underwriting bonds unless the issuer pledged in writing to provide ongoing disclosure to a nationally recognized information repository. Also, dealers could not recommend bonds to customers unless they had reviewed a municipal bond issuer's financial statements.
The interpretive release, which the agency says is currently in effect, says that investors need timely information about the events that have a material impact on the creditworthiness of issuers and their bonds. It lists 11 items that, at a minimum, should be disclosed where material.
Industry officials warn that issuers will stop at the 11 items and disclose nothing more. Panelists had a few things to say about that at a recent Bond Buyer conference on the SEC proposals.
"Why, if I were an issuer, would I want to issue anything more than the basic information called for?" asked Milton Wells, director of the office of federal relations for the National Association of Treasurers. "Who is going to pay for this brand-new world of disclosure? There are obviously accounting costs and costs to pay bond lawyers."
"Everybody's effectively going to chip in," said Charles Miers, assistant vice president of Allstate Insurance Co. "Issuers may be at the top of the list. Dealers will definitely pay something. Investors will generally reap the rewards. The foundation is sound ad the need is there."
Blake Anderson, senior vice president and director of tax-exempt research at Putnam Investments, said: "The [key is to make] the information really useful. No one will feel good about paying for a cosmetic exercise. If buyers and sellers are better informed in making investment actions, then people will more cheerfully step up to the plate."
In telephone interview, Langness of Springsted Inc. said that GOs should be exempted. "The SEC is trying to chop on the whole market," he said. "It should focus on revenue bonds, where current information is critical to credit quality." Once disclosure is working for revenue bonds, the commission can consider other sectors, he said.
But Miers recommended against segmenting the market when he spoke at the New York conference. "I'm not crazy about exemption by sector," he said. "Clearly some sectors have greater demands. [But] I guess [I look] at this as a board market reform, and I'd advise caution on slicing and dicing the market. Maybe you could have some of that in a transition period. But, full force, to have the best effect, it has to be integrated across the market."
Market participants interviewed by the Bond Buyer say they worry about other provisions in the rule and interpretative release.
Juarez, for instance, pointed to the interpretative release's statement that issuers need to release their annual financial statements as soon as possible and that apparently most issuers do so within six months after the end of the fiscal year.
"People are more comfortable with a nine-month deadline. And [they want] a fixed deadline," Juarez said. "If people know by mean when they have to comply, that will allow then to get their gears in motion. Some issuers [said] that before all the audits are done, it may be six months."It would take another three months to actually "turn around statements," he said.
"We get ours out superfast -- within 60 days of the end of the year," said Lynn Hampton, chief financial officer for the Metropolitan Washington Airports Authority. "But I'm an airport. I've only got one fund. If you go to Oakland, Calif., where there are multiple funds and they have to do them individually and then roll them up into combined financial statement, it's more work to create financial statements."
Rutledge worries about dealers being hit by a barrage of annual reports all at the same time. "Financial reports are pretty large. I'm wondering what some of these poor analysts in some of these places are going to do when a thousand reports show up in one of these repositories at the very end of December, right around Christmas, "she said.
Juarez said California local issuers are wiling to improve disclosure as long as they can stick to existing formats as much as possible.
"Officials are reluctant to develop the new forms or reports that are required by this process. They can provide [what they already have] if they know who to send it to. "He said local issuers think model disclosure formats developed by the National Federation of Municipal Analysts are too detailed.
"If you go with NFMA you have to go with new forms," Juarez said. "So now you're asking a public official to provide a new layer of documentation. There's cost associated with putting this on line. Things don't go out without levels of review. To get all that done costs money and time. Who bears the costs?
"To the extent you go beyond what's already published you are going to [end up with] a lower level of compliance" by issuers, he said.
Juarez said local issuers also are worried about a provision in the interpretive release that says issuers should not stop at disclosing the material information they currently have on their bonds. They also should "assess whether the future impact of currently known facts mandate disclosure," the release says.
"We've heard concerns about anything where they are required to do projections," Juarez said. Issuers do not want to make any assumptions about future activity they could later be held liable for, he said. "They feel more comfortable reporting things that already have happened." They do not even want to quote someone else's projections, he said. "In lot of cases that could be one person's opinion,"
The SEC's interpretative release says that issuers of conduit bonds need to disclose significant developments about underlying obligors. In addition, the proposed rule would require issuers of pooled financings to provide financial and operating information on "significant obligors."
"They are going to have to spend a lot more time figuring out who they are going after, and what they want to achieve," Juarez said.
"There's a lot of concern in California that if you read the definition [of conduit bonds] literally,that it can apply to land,backed" offerings such as Mello-Roos bonds. He said the state already collects the information about Mello-Roos projects that it considers pertinent, and, therefore, more information gathering is unnecessary.
"It potentially creates an adversarial relationship between issuers and conduit borrowers." Juarez said. "They may feel for personal reasons [that they don't want] the competition to know their resources. The requirement could have a chilling effect on the willingness of the private sector to do public finance.
"If they are going to require disclosure, they should require it from those entities directly instead of putting the issuer in the middle and requiring the issuer to provide it."
Overall, said Juarez, "I personally believe that this will be one of the more significant changes to the public debt process not only in California but nationally that we've seen in the last couple of years. I have not heard anyone disagree with the general concept."