WASHINGTON -- Nine months after the American Bankers Association published secondary market disclosure guidelines for municipal deals, major trustees meeting in the Washington area this week reported scant interest among issuers in the system.
But bank officials, appearing Monday at an association meeting in Reston, Va., expect issuers to eventually adopt the measures. Therefore, they urged trustees to begin implementing systems now to avoid emergencies later.
"I can't imagine that you won't in the next year have at least one bond counsel or underwriter come to you in preparation for a bond closing with indenture language suggesting secondary market disclosure be built into the language," warned Thomas A. Kraack, vice president of Norwest Bank Minnesota, which in September 1990 became the first trustee to send notices of default and other critical information to the market in general using a central electronic repository.
"And if you don't have processes and procedures and examined your own internal controls prior to that time, you will be forced to scramble to make those proper linkages," said Mr Kraack, whose bank releases a variety of routine and event-specific notices to the market.
The guidelines urge issueres to build provisions into bond indentures giving trustees the go-ahead to release such sensitive information as draws on reserve funds through nationally recognized repositories. For outstanding issues, the guidelines recommend that trustees and issuers work out a side agreement to the indenture authorizing the trustee to release certain information not spelled out in the indenture.
Jeffrey Powell, vice president of First National Bank of Chicago and one of the chief architects of the guidelines, said the response to his bank's efforts to push for adoption of the standards was "dismal."
First National "blanketed" clients recently with the guidelines and got a "very minimal" response, he noted.
He said the bank is proceeding to some extent by sending everything that goes to bondholders to repositories, but will wait to send ongoing financials. No one opposed the guidelines outright, Mr. Powell said, "but they're kind of hiding."
"I think it's going to take some time," said Terry L. McRoberts, senior vice president for corporate trust at Bank of America and immediate past chairman of the bankers association's corporate trust committee, which wrote the standards.
Mr. McRoberts, formerly with Security Pacific, which merged into Bank of America, said Security Pacific chose not to send letters to issuers about the recommended disclosure language until there is more interest. But he said that while there are some bond lawyers who are neutral or against implementing the standards now, there are "pockets" of attorneys who are urging clients to adopt the standards.
And Mr. Powell said that despite the "tepid" response, the association has no plans to revise the guidelines to make them more palatable to issuers. "It is sound. We have seen nothing that would cause us to change it," he said.
"There's no mad rush to do this," Philip W. Rich, senior vice president with Sun Bank in Orlando, Fla., said. "It's sort of silence. We don't see the movement catching fire." Mr. Rich's bank uses national repositories to release default and call notices and any other major notices that go to bondholders.
"We weathered the storm. We didn't lose any customers and I kept my job," Mr. Kraack said in describing the bank's move ahead of the pack to provide secondary market disclosure to repositories. "And in the process we had to hurry up and build a lot of internal procedures and processes and make linkages to [national repositories] and figure out how to implement policies that are now standard for industry."
Mr. Kraack said a top issue with which the bank has struggled is how to time release of notices to national repositories so that large institutional investors with sophisticated equipment do not get them in advance of bondholders and small investors.
"I candidly admit that there [does not] exist yet a thoroughly efficient system that satisfies the requirement of absolute uniform release to all interested parties all at the same time," said Mr. Kraack, noting that he has "a lot of sympathy" for small investors in the process.
"We really struggled with how to time our notices to the national repositories," he added. "You didn't want a notice out in marketplace three days before the bondholders got them."
"We've really done a thorough analysis of our mail runs and we can pretty much anticipate within zip code area the release date of our bondholder information," he said. For bonds held largely by regional investors, the bank sends a notice to national repositories one day after the mail date to the bondholders, he said. And for bonds held by investors nationally, the bank sends the notice two days after the mail date, he said.
Mr. Kraack said the bank has reserved the right not to send some information to repositories. For instance, when the bank has some "litigation risk," particularly in a post-default situation, or when there is sufficient media coverage to hand the marketplace, the bank may not send data.
He noted that an underwriter recently tried to write language into bond documents that does not provide for secondary market disclosure but that allows the underwriter to have a part of any mailing that goes out to bondholders.
"We actively resisted that on the premise that in many cases they are holding for their own portfolio, but they are making a market," he said.