WASHINGTON -- Municipal market participants will have roughly six months to a year to comply with new secondary market disclosure requirements if members of the Securities and Exchange Commission adopt the staff's recommendations at a meeting this morning.
The SEC staff has recommended an effective date of July 3, 1995, for a proposal to bar dealers from underwriting bonds unless they have "reasonably determined" that the issuer has agreed in writing to provide ongoing disclosure of annual financial information and notices of material events, one commission source said.
But the annual information requirement would be applied for issuers' fiscal years ending on or after Jan. 1, 1996, the source said.
Under this proposed requirement, issuers and other market participants would have to annually update the key financial and operating information that appears in the official statements for their primary offerings. Issuers would also be required to disclose audited financial statements, but only if such statements are prepared.
The staff has recommended giving broker-dealers until Jan. 1, 1996, to put in place systems and procedures to monitor material events that could affect the bonds they recommend, the source said.
The staff recommended this requirement in place of an earlier controversial proposal to bar broker-dealers from recommending bonds unless they reviewed the financial information disclosed by the issuer.
The earlier proposal was scaled back considerably after market participants warned it might cause liquidity problems for some investors and possibly even bring the market to a halt.
Instead the staff is recommending that broker-dealers be capable of monitoring material events and that they consider existing Municipal Securities Rulemaking Board rules and the securities laws' antifraud provisions in deciding what information to disclose to investors when recommending bonds.
Issuers would be exempted from the secondary market disclosure requirements if they have $10 million or less of bonds outstanding. But to qualify for the exemption for offerings done on or after Jan. 1, 1996, they would have to agree to provide any available financial information to those requesting it or to a state depository, and would have to agree to disclose material events.
Most municipal bond participants reacted favorably yesterday to the staff's recommended secondary market disclosure requirements.
R. Fenn Putman, chairman of the Public Securities Association, said, based on a report in The Bond Buyer, that the recommendations appear to be "very good news for investors and workable for dealers and issuers as well." Putman, a managing director at Lehman Brothers Inc., said he was reluctant to comment further without seeing whatever documents the SEC releases after today's meeting.
At the same time, however, he said, "I highly commend the SEC and its staff for working closely with a coalition of dealers and issuer groups in crafting these new rules."
Jeffrey S. Green, general counsel of The Port Authority of New York and New Jersey, said the recommendations "seem reasonable" based on the summary of them. Green cautioned, however, that "the devil is in the details" and said he, too, is anxious to see the SEC documents, which are expected to be released on Monday or Tuesday.
Green, who chairs the Government Finance Officers Association's disclosure task force, said he is "encouraged" that the staff backed away from its earlier proposal to bar dealers from recommending bonds unless they reviewed the issuer's financial information.
"They seem to have paid attention to the comments" made by the industry and by a group of 10 municipal market groups that jointly responded to the SEC's initial proposals, he said.
Green said also that he is "gratified" that the staff avoided specifying the form and content of the annual financial information to be disclosed by issuers. The staff's call for annual updates of key information in primary offering statements "is not inconsistent with where the industry and the GFOA and others have been over the years," he said.
Green said that while the municipal market groups had hoped the SEC would re-propose the disclosure requirements instead of revising and adopting them, "we are very grateful for the cooperativeness of the SEC staff and the commissioners throughout this entire process."
"They really did a good job of trying to understand and cooperate and trying not to ram things down people's throats," he said.
Christopher Taylor, the MSRB's executive director, said that if the report of the staff recommendations is correct, "I think this will be good for the investor and good for the industry."
Anthony Guthrie, a managing principal of Reliable Trust Co. in Atlanta, said the staff's recommendations are "a good start."
Guthrie, who represents the American Banking Association on disclosure issues, said the recommendations properly emphasize the importance of disclosing material events. In addition, the recommended requirement for issuers and other market participants to annually update official statements is "workable," he said.
M. Lou Von Kaenel, a senior vice president of Thomson Municipal Services, which is sponsoring The Bond Buyer as a nationally recognized municipal securities information repository that would collect notices of material events and financial information, said the recommendations are "extremely positive for the industry."
Cathy Callender, a vice president of J.J. Kenny Co., Inc., which is sponsoring Kenny Information Services as a NRMSIR, said however that she needs more details before commenting on them.
