WASHINGTON - Bond lawyers dropped their opposition this week to a Municipal Securities Rulemaking Board plan to collect official statements of short-term debt and variable-rate demand notes for the first time.
The National Association of Bond Lawyers wrote the Securities and Exchange Commission saying it now supports the plan because it will make the MSRB's information library more complete. The group also said it is pleased that the board has opted not to collect documents prepared for limited placements, which the MSRB also had proposed.
The plan, if adopted by the SEC, means that official statements for almost all municipal bonds issued in the United States will be available from the board's official statement library, which began accepting documents last year.
The bond lawyers group warned in June that the MSRB proposal to expand the types of official statements it collects is really an indirect attempt by regulators to channel more information into the secondary market, which analysts and investors have complained has a dearth of data.
If issuers have to update official statements each time they come to market with a note offering, then the information will be available to buyers of their longer-term bonds in the secondary market, NABL said.
Such a move is not only an unfair burden and expense on issuers of short-term debt. which is generally sold to sophisticated buyers, but it may be "detrimental" to the overall push for improved secondary market disclosure, warned Jack Gardner, chairman of NABL's committee on securities law and disclosure, in comments filed in June with the MSRB.
That is because the information will be provided "out of context." said Gardner, a partner with Ballard Spahr Andrews & Ingersoll in Denver.
While the board's proposal means more types of issuers' documents will probably land in the board's Municipal Securities Information Library, the quality of some of those documents leaves much to be desired, Dean Witter Reynolds analysts warned recently.
"We see a distressingly large number of poorly constructed official statements" across the country, said Jeffrey Lipton, vice president for municipal research for the firm. His comments, which detailed Dean Witter's experience with the SEC's new primary disclosure rule, appeared in a two-part review in the firm's Institutional Newsletter.
Rule 15c2-l2, which took effect in January 1990, requires underwriters to review official statements before purchasing securities and to disseminate the documents to investors within tight time frames.
"No one particular region has a monopoly over inadequate financial reporting," continues the report, which examined 103 official statements in mid-August and found that an "alarmingly high number" could not win unconditional approval because of poor credit, poor disclosure, or both.
Dean Witter's analysts gave kudos to the quality of disclosure in four offerings by West Allis, Wis.; Virginia Beach;-Rockland County, N.Y.; and Union County, N.C.
"The four official statements all exhibited clearly labeled balance sheets, income statements, and changes in fund balances," Lipton said. The firms offered three to six years of financial documentation, he said, noting that it prefers five years of financial documents, but will accept three.
While many nonrated transactions are rejected for disclosure or credit reasons, Lipton said certain unrated deals often get "unconditional approval" from Dean Witter, in part because of the quality of disclosure. They include Texas utility districts, Arkansas school districts, Indiana local tax issues, and local general obligations in Washington State, Oregon, and Idaho.
He said Arkansas school district financings typically show a five-year trend of general fund operations and Texas utility districts general provide a three- to five-year general fund history.
"Many issuers have responded positively to [the MSRB's rule) by including detailed and comprehensive financial information in their official statements," Dean Witter wrote. "However, we call for even greater cooperation. The review process allows us to identify an issuer's strengths and weaknesses. Clearly, conservative debt practices, demonstrated fiscal resolve, a secure tax base, and strong economic diversification are all positive credit elements."
But Lipton said analysts are particularly disturbed by the excessive use of "boilerplate" language financial reporting formats that are often duplicates from earlier deals. "Inconsistencies and/or blatant errors are fairly common occurrences," he said, adding that these are recurring problems with certain financial advisers.
The Dean Witter report highlights four deals that did not get unconditional approval either because of credit or disclosure problems. The issuers are Sauk Center, Minn.; Espanola Public School District in New Mexico; Long Beach, N.Y.; and Greene County, Ohio, Sewer District.