WASHINGTON -- The National Federation of Municipal Analysts said yesterday it is time for issuers to lay their cards on the table and declare in official statements whether they will or will not provide ongoing information to the secondary-market.
The group's board of governors last week approved voluntary model language that issuers can insert in the introduction of the official statement that takes one step further the disclosure guidelines issued last year by the Government Finance Officers Association.
The analysts group says issuers should not only declare in the official statement whether they will provide annual reports and other ongoing information, as the GFOA recommends, but should also make known if they decide not to. The GFOA is silent in its recommendations on how to deal with issuers who choose not to provide ongoing disclosure.
The new NFMA resolution is the result of growing frustration among big buyers of municipal bonds that issuers are not responding to increased pressure from regulators and market groups for improved secondary-market disclosure.
A handful of associations have issued draft or final guidelines in the past year for improved continuing disclosure, including the GFOA, the NFMA, the American Bankers Association's corporate trust committee, the National Council of State Housing Agencies, and the Association of Local Housing Finance Agencies. Regulators also continue to warn issuers that a failure to improve secondary-market disclosure will lead to new regulation of the market.
Nevertheless, complaints are mounting that market participants are not responding quickly enough to the call.
"It's the status quo," warned Richard Ciccarone, senior vice president and director of fixed-income research at Kemper Securities in Chicago. "Very few official statements are mentioning that the issuer will provide continuing disclosure," said Mr. Ciccarone, who heads the NFMA panel that developed the resolution. "If issuers would comply with the resolution, this would really diminish dramatically the threat of regulation.
"Whether you have or have not made provision for ongoing disclosure is significant to the offering," he continued. "Issuers should disclose their intentions to investors. Are they going to provide it, or are they going to subscribe to the status quo? If the issuer chooses the latter, fine. But, at least the investor knows up front where he stands."
In a speech before the American Bar Association last week in Atlanta, Securities and Exchange Commission member Richard Roberts illustrated the need for access to secondary-market information by pointing out the problems experienced by investors who bought bonds backed by Mutual Benefit Life Insurance.
He said that within a matter of days of Mutual Benefit's seizure by regulators -- and subsequent ratings downgrade -- highly liquid bonds, many with variable-rate demand features that offered investors seven-day puts, had become illiquid.
"In some cases," he said, "there was very little information about the underlying credit to support an investment decision, which caused any potential secondary market to evaporate."
The analysts released the resolution yesterday despite their inability, following a concerted effort, to get other industry groups to sign on.
"We don't know yet," said George Brakatselos, chief staff member in charge of the Public Securities Association's municipal division, when asked whether the group will endorse the analysts' assessment.
He said the PSA is worried the language the analysts use in their resolution inadvertently will make the current situation even worse. He asked, "If you present an issuer with these two choices and it picks the second one, are you providing it with an out in terms of" providing ongoing disclosure?
But he said the language is a good idea if the market responds and prices bonds differently based on whether they pledge to make disclosure or not.
"The advantage of this is you get a sense of what the issuer intends to do." That is helpful because "we still have a long way to go as far as really improving secondary-market disclosure."
Jeffrey Green, chairman of the GFOA's committee on disclosure, told lawyers attending the bankers association meeting in Atlanta last Monday that he personally may support the new language. But the GFOA itself has not signed on yet.
"I'm not sure taking it to next step is a bad idea," Mr. Green said. "That's an important part of the pricing of bonds," particularly in the conduit bond area, he said.
Bond lawyers, who were expected to raise major concerns with the resolution, also have not signed on.
The NFMA's resolution calls for official statements to include one of the following two statements: "The issuer (or the issuer's agent) will provide annual financial statements and other pertinent credit information, including the comprehensive annual financial report, if one is prepared upon request," or , "The issuer has made no provision to provide any annual financial statements or other credit information to investors on a periodic basis."
Analysts are recommending that the language be highlighted in the official statement.
