WASHINGTON -- The municipal market will determine the extent to which issuers will be able to take advantage of a provision aimed at casing some of the burden of the Securities and Exchange Commission's secondary market disclosure rules, lawyers and analysts said last week.
The provision allows issuers and obligors in disclosure documents to refer to, rather than actually provide, certain financial information that is available elsewhere, such as an annual financial report of a corporate borrower.
Robert Dean Pope, a lawyer with Hunton & Williams in Richmond, said the provision could allow an issuer who goes to market with two similar issues three months apart, in disclosure documents for the second issue, to simply refer to the official statement for the first issue and then disclose more recent developments.
But, Pope said, "It will be interesting for me to see if the market accepts as much incorporation by reference as the release seems to allow."
"My suspicion is that ... regardless of how nifty this sounds to us bond lawyers, we may be told that the market doesn't want to do it that way," Pope said.
Andrew Kintzinger, the president of the National Association of Bond Lawyers, agreed.
"It was a nice addition to the release but I think the market will require more financial and operating data as a result of the rules," said Kintzinger, a lawyer with Briggs and Morgan in Minneapolis.
Analysts and broker-dealers probably will not want issuers and obligors to do a lot of incorporation by reference, said Katherine Bateman, an assistant vice president at John Nuveen & Co. in Chicago and a former chairman of the National Federation of Municipal Analysts.
"I don't think the market will like it very much," she said.
If key financial information is not actually provided, she said, that could force analysts and broker-dealers to get copies of the documents before recommending bonds.
"That's time-consuming," she said.
If they cannot get the documents, they may not be able to recommend the bonds, she added.
Pope also said that one of the big concerns in the wake of the SEC's adoption of these disclosure rules is how well material-event disclosure will work.
The rules require issuers and obligors to send repositories or the Municipal Securities Rulemaking Board -- as well as any state depository where the bonds are issued -- notices of material events that could affect bonds, such as delinquent debt service payments or rating changes.
"I think that the municipal world still does not fully understand what event disclosure is," said Pope. "The great majority of issuers and bond lawyers have not dealt with event disclosure."
"I'm concerned that local governments will have some difficulty figuring out both What it is that requires event disclosure and how promptly [notices of material events] must be gotten to the market," he said.
Several other market participants agreed.
But Kintzinger said that he has dealt with several event disclosures and that in each case the parties to the bond transaction had no problem agreeing about what should be disclosed and when.
"I seldom see disagreement over whether certain events are material for event disclosure purposes," he said.
Kintzinger added: "The strength of the release and the rules is that in so many instances they refer to the participants of transactions and their professional judgment to determine what's material. That's good."
The SEC rules and release provide flexibility for market participants and show that the SEC was sensitive to both the needs and concerns of the municipal bond market, he said.
Bateman agreed. "I think accommodation is a key word here. What they tried to do here is accommodate as many of us as they could."
Fredric Weber, a lawyer with Fulbright & Jaworski in Houston, said the rules "are more flexible and better than what was proposed."
However, he said, the SEC appears to have effected a "sleight of hand" with regard to its earlier proposed requirement to bar broker-dealers from recommending bonds unless they had first reviewed the issuer's financial information.
The final rules say instead that broker-dealers must have systems and procedures in place for monitoring material events that could affect the bonds they recommend.
However, the SEC reminds brokerdealers in its release on the rules that they may have to take issuers' financial information into account when recommending bonds under existing Municipal Securities Rulemaking Board rules and securities laws' antifraud provisions.
"They still have a duty to their customers to review or otherwise take into account" such information, said Weber. So all of the concerns about the proposed requirement should still be valid, he said.
But bond lawyers and other market practitioners will probably have many questions about how to comply with these rules as they move toward the effective date of July 3 next year.
Under the SEC rules, issuers and obligors must agree in writing to provide ongoing disclosure for primary offerings done on or after that date.
