WASHINGTON -- Ten market groups yesterday called for major changes in the Securities and Exchange Commission's proposals for improving disclosure in the municipal securities market.
The groups, which include the Government Finance Officers Association and Public Securities Association, urged the SEC to overhaul a two-part provision that would bar dealers from underwriting bonds unless the issuer has pledged in writing to provide ongoing disclosure to a national repository. The provision also would prohibit dealers from recommending bonds to customers unless they have reviewed an issuer's financial statements.
The SEC should raise the dollar amounts of issues that would be exempt from the rule and take a more "common sense" approach to "political" disclosures by issuer officials, the 10 groups said in a 27-page comment letter to the SEC. Also, the SEC should delete a provision that would require that the final official statement to provide financial and operating information on "significant obligors" of an issuer, they said.
The joint letter said that the rules should not take effect until after systems to collect, "centrally index," and disseminate information are tested and fully operational. And once those systems are in place, all issuers should have six months to prepare for the changes, with small issuers getting one year, the groups said.
The groups rejected the SEC's call for registration of conduit bonds because of "the costs" and because regulators should study the impact of the new disclosure rules before taking such a "drastic step."
The 10 groups were part of the dozen associations that sent a "joint statement" to the SEC on Dec. 20 recommending changes in primary and secondary market disclosure that served as a blueprint for the rules and legal interpretation issued for comment by the SEC March 17. Absent from the list who signed yesterday's letter were the National Association of Bond Lawyers and the National Association of State Treasurers.
"We believe that problems in the municipal securities market are best addressed by increased enforcement of existing rules and by a more narrowly drawn set of regulations as suggested in our original joint statement," the groups said.
The groups said they support the SEC's proposed restriction on underwriting if the issuer has not pledged to provide ongoing disclosure. But they said they "reject the notion that a single, uniform disclosure rule can be applied fairly and effectively across the board to all municipal issuers."
The SEC should take a "flexible approach that allows issuers to determine the form and content of information to be provided to the market on a case-by-case basis using as a guidepost" the long-held federal standard that issuers should disclose any material that is "material," the groups said.
The commission should not require issuers to pledge ongoing disclosure in a separate written agreement or contract, the groups said. It should be enough to have a statement in the bond resolution or official statement or other documents, as long as it represents a binding contract, the groups said.
The SEC would require issuers to provide an audited annual financial statement. The groups agreed that statements should be required of issuers annually, but they need not be audited. They could be a statement that is "reviewed" by an accountant, they said.
Groups are worded that the SEC's rule would lead to a "two-tier" market that could affect bonds issued before the effective date of the new rule. They urged the SEC to propose a new rule "designed to provide maximum useful information to investors about securities issued before" the rule takes effect.
The rule would require dealers to provide buyers of such securities with any information in their possession about whether the issuer of a bond has committed to provide continuing disclosure to a repository and whether the bond is rated. If rated, the dealers should disclose the rating. Dealers also should have to tell investors if they do not have the information in their possession, the groups said.
The groups said that the SEC's controversial proposal to bar dealers from recommending bonds if they have not reviewed the issuer's financial statements "could impose significant compliance burdens on broker-dealers," could freeze trading in the secondary market for certain outstanding bonds, and will not make more or better information available to investors.
They urged the commission to propose a "strengthened" version of the requirement that dealers currently are expected to follow, which is that they have a "reasonable basis" for any recommendation to purchase, sell, or hold a particular bond.
The groups did not spell out what they mean by "strengthened."
A broker-dealer should not be required to make a specific determination that it has a reasonable basis to enter into a transaction if the investor is an institutional buyer or the transaction is unsolicited, the groups said.
Concerning political dialogue, the groups said that the antifraud rules should not be applied generally to public statements by government officials.
"It is essential that the SEC clarify that a standard of reasonableness applies in this area and permit a common sense distinction between political rhetoric and statements that are deliberately intended to reach and influence investors," the groups said.
The groups said the "significant obligor" provisions should be deleted and replaced "by emphasizing the importance of disclosing material information about the source or sources of payments of the bonds."
If some form of the significant obligor concept must be retained, it should apply only to financings by pools and similar entities, and a "materiality" standard should be used to decide whether disclosure about a significant obligor should be made by the issuer or obligor, the groups said.
Other groups that signed yesterday's letter are the American Bankers Association's corporate trust committee; the American Public Power Association; the Association of Local Housing Finance Agencies; the Council of Infrastructure Financing Authorities; the National Association of Counties; the National Association of State Auditors, Comptrollers and Treasurers; the National Council of State Housing Agencies; and the National Federation of Municipal Analysts.