WASHINGTON -- J.J. Kenny Co. said this week that it intends to be a "major participant" in whatever disclosure system the Securities and Exchange Commission adopts, and urged the SEC to move carefully in developing the electronic network that will be the system's linchpin.
"The role of the nationally recognized repositories is obviously crucial to the effectiveness of the system, and it is therefore of vital importance that the structure of the repository network be considered with great care," Kenny president James R. Quandt said in a 12-page comment letter to the agency this week.
Quandt was commenting on a proposed rule and legal interpretation issued for comment by the SEC on March 17 aimed at improving secondary market disclosure in the municipal market.
The SEC's proposed rule would bar dealers from underwriting bonds unless the issuer has pledged in writing to provide ongoing disclosure to a nationally recognized information repository. A controversial provision would bar dealers from recommending bonds to customers unless they have reviewed a municipal bond issuer's financial statements.
Kenny's chief said that the SEC should stick with the current market standard, which says that a dealer must have a "reasonable basis" for recommending a security but does not require the dealer to have actually obtained and reviewed all bond documents.
The rule could have a "revolutionary impact," Quandt said, including decreased liquidtry for all but the most active issues.
Quandt also said that the SECs proposed rule would not give national repositories enough time to make key documents and notices available to the market.
The SEC proposed that nationally recognized municipal securities information repositories be required to make final official statements and annual financial information available to market participants by the next business day after they are received by the services.
It also proposed that the repositories be required to release notices of material events within 15 minutes after they are received by issuers.
But Quandt said the proposed deadlines "are not practical." He said "the minimum realistic turnaround periods" would be two business days for final official statements and annual financials and one business day for most notices of material events.
Quandt said he recognizes that certain information, such as a default, is so market sensitive that a one-day turnaround may be too slow. The SEC could require issuers to transmit such information by fax machine or by "electronic coded text," which would ensure "quicker availability," he said.
"The commission must take into account that most annual financial information and notices of material events arrive during peak periods," Quandt said. "In the case of just one type of material event, redemption, we typically receive between 50 and 300 notices daily, most of which arrive simultaneously in the day's mail delivery."
Quandt said the SEC should allow issuers to deliver and repositories to disseminate information in the form of images of documents rather than exclusively as coded text.
The latter would create a filing system similar to EDGAR, the SEC's electronic disclosure program for stocks. The General Accounting Office has reported that the EDGAR system has cost the federal government alone more than $70 million to carry out, Quandt noted.
"Any attempt to achieve a universal [system] of coded text would be counterproductive and prohibitively expensive," he said.
He said it is "unrealistic" to expect small or infrequent issuers to make the investment necessary to do coded text. But he said that since national repositories would be expected to serve all issuers and users in the municipal market, they should be required to have the capability to receive and transmit coded text.
Quandt said that issuers should be required to file disclosure documents to all recognized repositories rather than choose among the information banks. He predicted that it would not be "unduly burdensome" because few entities will qualify as repositories because of the complexity of the systems.
He added that if the SEC goes the multiple repository route, a central index of bond documents will not be needed. But some method would be needed of assuring that the filings arrive at about the same time, he said.
Quandt opposed state-based repositories. "We believe it would be inefficient and add to the complexity of an already complex system," he said.
It is hard to calculate what it will cost repositories to build the disclosure system envisioned by the SEC, he said, and it is thus essential that repositories be permitted to charge "reasonable fees."
"Each repository must invest in advanced computer hardware, software, and networking systems and appropriate operational staff to maintain such systems," he said.
Quandt said the SEC's rule should be phased in, beginning with a period of voluntary implementation starting at least one year after the rule is adopted. Then the SEC should phase in large and frequent issuers for a "suitable period," followed by the rest of the market.
