WASHINGTON -- Issuers, dealers, and information vendors continued calling for wide-ranging revisions to the Securities and Exchange Commission's municipal bond disclosure measures yesterday as comments on the proposals poured into the agency over the weekend.
Cities said they oppose a "quick-fix approach" to improving disclosure and urged the SEC to conduct a more careful analysis before mandating any changes. Public power and other bond issuers said that the commission's definition of key terms such as "significant obligor" and its outline of those issuers that are exempt from the rule are too rigid. Information vendors urged regulators to limit the number of national repositories designated to serve as the electronic hub of the system.
The comments come as a panel representing 12 issuers was scheduled to meet in Washington yesterday to attempt to hammer out a unified comment letter on the proposed rule and interpretive release that were published for comment by the SEC March 16. Comments on the measures were due Friday, but many of the issuers in the group are waiting to file their individual comments until the consortium's letter is sent to the SEC.
The proposed rule would bar dealers from underwriting bonds unless the issuer has pledged in writing to provide ongoing disclosure to a nationally recognized information repository. Also, dealers could not recommend bonds to customers unless they have reviewed a municipal bond issuer's financial statements.
The interpretive release, which the agency says is currently in effect, reminds issuers that their disclosure documents are subject to the antifraud statutes and points to areas that need improvement. The release lists 11 items that, at a minimum, should be disclosed where material.
Sharpe James, president of the National League of Cities, strongly urged the SEC to defer "precipitous action" until completion of a "careful analysis" of the costs and benefits of the rule. Once the analysis is done, said James, who made his comments in an 11-page comment letter yesterday, the league encourages a "joint effort" to determine what changes are appropriate.
James, who is mayor of Newark, N.J., said that current proposals are already adversely affecting some local governments. And "the proposed liability standards threaten a chilling effect on written and oral statements by public officials, pitting public advocacy responsibilities against federal regulations," he said.
James said the SEC should not mandate continuing disclosure. Instead, it should simply require issuers to disclose when they refuse to provide ongoing information, he said. And the SEC should prevent sales of conduit securities issued by towns with weak or unstable credit to less sophisticated buyers when there is no commitment to provide continuing disclosure to both bondholders and issuers, he said.
The SEC should acknowledge that political dialogue is not subject to antifraud liability unless made with the intent of influencing and misleading investors, James said. And the commission should allow issuers to designate an official as spokesperson, he said.
If the SEC does mandate continuing disclosure, it should limit the requirement to conduit issues and it should exempt "securities initially sold only to accredited investors and/or intrastate," James said. If traditional public purposes are nonetheless covered, the SEC should phase in coverage and exempt securities with an investment-grade rating, James said.
The proposed rule would require that financial and operating information on "significant obligors" of an issuer be provided in the final official statement and in annual financial documents. The rule defines a significant obligor as one that is the source of 20% or more of the cash flow servicing the obligations on the bonds.
"Many of our members believe that the threshold level is arbitrary and too low," said Alan H. Richardson, deputy executive director of the American Public Power Association, in a 13-page comment letter filed Friday. "This adds significant administrative burdens and costs of providing this information," said Richardson, who proposed that the threshold be raised to 30%.
The SEC's proposed rule would exempt offerings if, at the time the issuer delivers the securities to the underwriter, the issue will have less than $10 million in aggregate amount of municipal securities outstanding, including the offered securities, and the issuer will have issued less than $3 million dollars in aggregate amount of municipal securities in the most recent 48 months preceding the offering.
"The $10 million/$3 million proposed small and infrequent issuer exemption is too little and too complicated for the audience it is intended to help," Richardson said. "It will burden a significant number of small governmental issuers, but will not substantially improve investor protection because bonds of the affected small issuers generally are not investment risks."
Richardson recommended that the SEC exempt issuers who have less than $25 million of long-term debt outstanding and that the exemption be indexed to inflation.
Richardson also noted that the rule requires issuers to notify the market of certain events, if they are material. "Our members would like the commission to give guidance as to the definition of material," he said.
The Association of Local Housing Finance Agencies said the rule and interpretative release are "inappropriately broad" for housing bonds. The group said, for instance, that it is inappropriate to require audited financial statements for single-family mortgage revenue bonds and multifamily housing revenue bonds, and attached a copy of a reporting form that the group recommended last year for both types of issues.
The association also said that the definition of "significant obligor" is unnecessary. Issuers should disclose information about an entity only if its financial condition is "material" to the source of payment of the bonds, said John Murphy, executive director of the association, in a 12-page comment letter released yesterday.
Murphy also said that the small-issuer exemptions should be expanded and simplified. "If less than $3 million in aggregate amount of municipal securities has been issued in the past 36 months based on a single source of payment, there should be an exemption from all continuing disclosure requirements," he said.
Oregon Treasurer Jim Hill said that besides audited financial information, the proposal calls for annual disclosure of "pertinent operating information" by the issuer and any significant obligors.
"Such a standard will wreak havoc on large issuers, who could conceivably be required to file every public statement -- formal or informal -- on the budget made by elected and appointed officials [and even candidates] at all levels of government," Hill said in a seven-page comment letter.
Debra G. Heffernan, executive vice president of The Bond Buyer, said that the SEC should call for annual financial documents from those segments of the market that are the "trouble spots," such as nonrated and conduit issuers. But it should require continuing disclosure of material events of all issuers immediately, regardless of rating or debt outstanding.
Heffernan said she needs more detail about what the SEC is looking for in a repository before she can determine if it would be commercially viable for The Bond Buyer to become a repository under the new rules.
"The very ability of the municipal industry to comply with the commission's proposed amendments rests squarely on those responsible for the collection and dissemination of the information," Heffernan said.
"Therefore, we encourage the SEC to clearly state its expectations with regard to the process, and outline the specific requirements to be met by those inclined to assume the role of repository," she said.
Heffernan said the disclosure system must be electronic to avoid eroding market liquidity, and she got down to some basics.
Collection would be most efficient if the documents were in ASCII and a common word processing or publishing format, and if all issuers used the same format, such as ADOBE Portable Document Format or Rich Text Format, she said.
Too many national repositories will add to the confusion, she said. States should not be designated national repositories unless they are capable of meeting all industry requirements for national electronic distribution. "We question the states' ability to properly deliver material event notices in a timely manner," Heffernan said.
Peter J. Schmitt, president of Disclosure Progress Corporation in Fort Lee, N.J., said the "best mechanism" for delivering secondary market disclosure information to the market would be to designate the Municipal Securities Rulemaking Board's information library as the sole clearinghouse for secondary market submissions by issuers. The Municipal Securities Information Library should then be required to redistribute the information it receives, at a fee, to any entity willing and able to receive the information, he said.
Schmitt's firm gets digital images of official statements from the MSRB and redistributes them on CD-ROM to broker,dealers, mutuals, law firms, universities, and others on a periodic basis. It is the first company to successfully offer such a service to the municipal industry, Schmitt said.
The firm is not currently a nationally recognized repository, but it is qualified and may request designation depending on the final form of the amendments to Rule 15c2-12, Schmitt said.
He said that multiple repositories, each with a unique collection of secondary market disclosure documents, will confuse investors and bond market participants. He strongly urged the SEC to require that all secondary market disclosure be submitted in electronic form and noted that virtually all financial statements, letters, and other documents produced in the United States today are produced on computer spreadsheets, word processors, or both. "The text of these documents exists in electronic form before it ever appears on paper," Schmitt said.
