Tomorrow marks the deadline for the Securities and Exchange Commission to receive comments on the amended proposal of the Municipal Securities Rulemaking Board to establish a Continuing Disclosure Information System.
Although I have no specific objections to the MSRB's amended proposal, I do not believe it will significantly advance secondary-market disclosure. There are already systems in place for the collection and dissemination of documents.
However, the activities that will lead to effective municipal market disclosure of necessity must go far beyond the mere collection and dissemination of documents.
Central to a system of effective disclosure is the provision of continuing education to state and local government officials about the content of disclosure documents.
To accomplish this, all participants must work together as a partnership to develop producers that will benefit issuers and investors alike. Significant actions have taken place at the national level in both these areas in recent years.
I believe the logical and important next step is for issuers to understand their unique and central responsibility for more and better disclosure and to take advantage of the guidance and facilities available to them in carrying out this responsibility.
Although there have been significant improvements in disclosure practices in recent years, the task of improving disclosure is not finished.
To remind issuers to renew their efforts the following editorial will be published in an upcoming issue of the Government Finance Officers Association's Government Finance Review. Its full text follows.
The Issuer's Responsibility
The title of this editorial is not controversial, it is a statement of fact. Despite the efforts of some to cloud the issue, disclosure is an issuer responsibility.
And always has been.
Issuers and the buyers and sellers of their debt come together in one place -- the municipal bond market -- every day to raise capital for projects essential to each community and to the whole nation.
As participants in these transactions, finance officers have a special responsibility to the marketplace -- the responsibility to disclose important information about their government and its securities, both at the time the debt is sold and while it is outstanding.
Fortunately, municipal issuers are not subject to the same complicated financial disclosure requirements imposed by the federal securities laws on corporations and enforced by the SEC.
They rely on a self-regulatory system for which the GFOA Disclosure Guidelines for State and Local Government Securities is a central component. For almost two decades the GFOA Guidelines have provided the basic substantive recommendations as to the content of disclosure documents.
In recent years, other issuer groups and professional organizations have developed additional guidance which is also helpful to issuers in fulfilling their responsibilities. The level of cooperation and coordination in improving municipal disclosure has never been greater, and it is growing with each new effort.
Why all the activity surrounding disclosure? It is fair to say issuers and the buyers and sellers of their debt are not completely happy with the current voluntary system. But perhaps more importantly, Congress and the SEC have indicated they are not happy.
Highly publicized municipal defaults have caught the attention of federal lawmakers. And the SEC has been under increasing pressure from Rep. John Dingell, Chairman of the House Committee on Energy and Commerce, to ensure investors in municipal securities are adequately protected.
In addition to all the advances over the last several years related to disclosure, there have been significant achievements in financial reporting by state and local governments.
Consider the growth of the GFOA Certificates of Achievement in Financial Reporting Program: 889 submissions in 1985; and 1,665 in 1990. Nevertheless, the issuer community is getting a bum rap because of the faults -- and the defaults -- of a small number os issuers, many of whom issue what should be call 'non-municipal bonds' because of their private conduit character.
In an Oct. 14 editorial ["A Big Step for Disclosure"], Craig Ferris says the failure to provide secondary-market disclosure has become the Achilles' heel of the municipal bond market. A Public Securities Association official is quoted as saying "anything is better than where we are now ... secondary-market disclosure has gone backward in the past year as lawyers have advised trustees and issuers not to disclose information upon request because of fear it could lead to market manipulation and charges of insider trading."
Nothing could be further from the trut. In fact, there have been substantial advances in secondary-market disclosure in terms of content, availability, and willingness of issuers to provide information.
There have even been unconfirmed reports that some of the professionals who work for issuers have taken the attitude that the GFOA Guidelines should not be actively consulted or used at all.
If true, this advice is short-sighted and inconsistent with sound practice. Not only are issuers at risk of further regulatory or legislative intrusion but the market may make price differentials between issuers that provide adequate disclosure and those that do not.
Although some bond attorneys correctly state tht there is no absolute legal obligation for issuers to provide secondary-market information, issuers must distinguish between rigid legal requirements and their responsibilities to the marketplace.
Issuers are certainly not precluded by law from providing information to the secondary market. The most prudent advice for professionals who work for issuers to give -- advice which most responsible bond counsel are, in fact, providing -- is that issuers should provide timely information to investors on a continuing basis, not that they must provide that information.
The municipal market provides a stark example of the fact that voluntary self regulation can and does work. What should finance officers do today to foster improvements in disclosure today and preserve this voluntary and flexible system?
* Consult the GFOA Guidelines and the National Federation of Municipal Analysts's Disclosure Handbook. Also, if appropriate, they should be familiar with the American Bankers Association's Disclosure Guidelines for Corporate Trustees, and the National Council of State Housing Agencies recommended quarterly reporting formats for single-family housing issues.
* Send or provide for their underwriters to send copies of official statements to the three central repositories recognized by the SEC: KennyAlert Disclosure Service; Bloomberg Financial Markets; and Munifacts Secondary Market Disclosure Service. Copies of official statements are also being sent to the Municipal Securities Information Library by underwriters as required by the MSRB's Rule G-36.
* Send copies of comprehensive annual financial reports and other continuing disclosure information, including time-sensitive information describing events that have a major effect on a government's finances, to the central repositories. In this connection, announce in the official statements that information will be provided and tell the underwriters at information meetings and in other appropriate forums that because this is being done, a price advantage is expected on these bonds.
* Include a requirement in requests for proposals that outside professionals working on disclosure documents follow the GFOA Guidelines.
* Stay on top of new developments in disclosure such as the GFOA's Illustrations and Examples publication and the forthcoming guidance from the Association of Local Housing Finance Agencies and the National Council of Health Facilities Finance Authorities.
Although there have been significant improvements in disclosure practices in recent years, the task of improving disclosure has not been fully completed. Issuers, working with their advisers, must take responsibility for more and better disclosure. The consequence of retaining the status quo will be continued controversy, federal regulation, and higher prices for our bonds.
Mr. Green is acting general counsel of the Port Authority of New York and New Jersey and a member of the Government Finance Officers Association's executive board.