WASHINGTON -- The Public Securities Association, as expected, threw its support behind most of the Securities and Exchange Commission's disclosure initiatives yesterday, but implored the SEC to drop some key provisions that the PSA believes would seriously disrupt market liquidity.
"The commission's initiative is a major stride in the evolution of disclosure practices in the municipal securities market," PSA chairman R. Fenn Putman said in a 17-page comment letter. "The scope is well targeted and not burdensome for issuers."
But the system envisioned by the SEC will not work if the agency bars dealers from recommending bonds to customers unless they have reviewed the disclosure documents the issuer has contracted to provide, Putman said.
Putman also urged the commission to drop a provision that is drawing strong objections from the market that would require issuers to disclose financial information for "significant obligors." He said that "judgments on the necessary disclosure should be left to the issuer."
Putman was referring to key provisions contained in a set of amendments to the SEC's municipal disclosure rule that the agency proposed on March 17. At that time, the SEC also released its legal interpretation of issuers' disclosure responsibilities under the federal antifraud statutes. Comments on both initiatives were due July 15.
The PSA's chairman explained why he is troubled by the provision that would bar dealers from recommending bonds unless they have reviewed documents.
"Once an issuer deposits a 200- or 300-page annual report with a repository, dealers would be forced to stop trading in the securities of that issuer until they have reviewed the document. This would freeze the market for that issuer's securities regardless of the nature of the information contained in the document," Putman said.
The SEC's current requirement that dealers have a "reasonable basis" for recommending bonds to customers works well, he said, and an additional standard is unnecessary. Putman contended that dealers know they cannot just rely on a bond's rating to satisfy the test.
Putman conceded that the rule's benefits would not "come about instantly" as the mechanism that the SEC has proposed is complicated. "Nevertheless, we are confident that it will work" because of a "powerful" provision in the interpretive release that makes clear that issuers do not "have the option to remain silent" under the antifraud provisions of the federal securities laws, said Putman, who is a managing director at Lehman Brothers.
He added that there will be a "significant economic penalty" for those issuers that do not conform to existing rules.
And he called "implausible" suggestions made by some market participants that dealers will not make use of the information that will pour into bond repositories as a result of the SEC proposals.
Putman also urged the SEC to use caution in defining the term "conduit bond."
"Prior to seeking legislation on conduit borrowings, we believe the commission should identify specific problems in this area and limit any proposed definitions to areas with identifiable problems," he said.
The rule should require issuers to state their disclosure plans in trust indentures or bond resolutions, Putman said. "This would eliminate any uncertainty" that the issuer's pledge is a contractual one, he said. It would not be sufficient for issuers to simply add a statement to final official statements pledging to provide ongoing disclosure, he said.
He urged the SEC to "expressly acknowledge" in the rule that issuers can make generalized pledges in bond documents about their intentions. Issuers could pledge to provide "such documents and information as may be necessary in the opinion of counsel, to comply with the information provision requirements of 15c2-12, or other similar disclosure requirements and regulations," the PSA suggested.
The PSA said that the SEC should not require issuers to use generally accepted auditing standards or generally accepted accounting principles. Issuers, however, should be required to note where they deviate from those requirements, Putman said.
In addition, the SEC should not give issuers a deadline for providing annual financial information, Putman said.
Putman called "appropriate" the list of 11 material events listed by the SEC in the proposed rule and legal interpretation. Issuers should be required to release the information within hours after the event has occurred, he said.
The SEC requested comments on whether a "seasoned issuer" should be allowed to incorporate documents by reference in the final official statement. Putman supported the idea as long as the documents are readily accessible. The definition of a seasoned issuer should depend on how frequently an issuer accesses the market and the dollar amount of securities outstanding, he said.
Issuers are exempt-from the SEC's current disclosure Rule 15c2-12, which was implemented in June 1989, if they are issuing less than $1 million of debt. The agency's proposed rule would exempt an offering if the issuer will have less than $10 million in aggregate amount of municipal bonds outstanding including the offered securities, and the issuer will have issued leSs than $3 million in aggregate amount of municipal securities in the most recent 48 months preceding the offering.
Putman said the exemptions are "appropriate."
He said that if an issuer has designated a repository other than the Municipal Securities Rulemaking Board, the nationally recognized repository should be required to inform the MSRB of any filing immediately. Issuers should send notices of material events via facsimile "or other electronic means," and annual financial information should be forwarded using next day mail if electronic means are unavailable, Putman said.