SEC directive is inducing issuers to state disclosure intentions in bond documents.

WASHINGTON -- The Securities and Exchange Commission's new interpretive release on disclosure is starting to take root in the municipal market, as one issuer after another is beginning to declare in official statements whether it does or does not intend to provide ongoing disclosure.

"The state of Alaska intends to prepare and provide periodic financial reports, including an annual financial report," the state said in the preliminary official statement dated April 29 for a $48 million offering of general obligation refunding bonds.

"Copies of all periodic reports, as well as the official statement for this issue, may be obtained through a nationally recognized municipal securities information repository," the statement said.

Alaska added that investors and other interested parties can contact one of the following repositories for additional information: Bloomberg Financial Markets, Kenny S&P Information Services, and The Bond Buyer's repository.

By contrast, in the preliminary official statement for a new $37.6 million offering of San Juan Project revenue bonds, Utah Associated Municipal Power Systems stated clearly that it will not provide disclosure.

"Neither UAMPS nor the City of St. George is at this time committing to provide any information on an ongoing basis to the owners of the Series 1994 Bonds, or to the secondary market generally, in connection with Series 1994 Bonds," the Utah issuer said. St. George is the participant with the largest debt service share for the San Juan Project.

The two examples were outlined by John H. Allan, editor of The Bond Buyer, at a conference in Chicago June 3 on new federal initiatives on disclosure sponsored by Prentice Hall Law & Business and Fordham University School of Law.

Similarly, an issuer of hospital bonds said in a June 1994 official statement that it "may elect from time to time to provide disclosure information to one or more nationally recognized repositories, but it has not contractually bound itself and does not presently covenant, to do so."

"Neither the city, the trustee nor the hospital has bound or intends to bind itself contractually to furnish any additional information to the holders of Series 1994 Bonds, in the form of a statement such as this official statement or otherwise, on an ongoing basis after the date of this official statement," said the issuer, whose identity was not available.

The hospital did, however, agree to update the official statement for the June 1994 offering for 90 days if there is any event that might "affect the completeness or correctness of any statement of material fact."

Hemet, Calif., said in a May 3 preliminary official statement for $2.25 million of certificates of participation that "the purpose of the official statement is to supply information to prospective buyers. The City has not entered into any contractual commitment to provide information on a continuing basis to investors or any other party."

All four issuers were responding to an interpretive release issued by the SEC March 9. The release said that under the antifraud provisions of the federal securities laws, it is good practice for an issuer to state clearly on bond documents whether it intends to provide ongoing disclosure, and if so, the type of disclosure, how quickly it will provide it, and what repository or repositories it will use.

The interpretive release is already in effect, but the SEC is accepting comments on the document until July 15.

"It's beginning to happen," Katherine Bateman, assistant vice president and sector manager for higher education securities at John Nuveen & Co. in Chicago, said at a recent panel discussion on disclosure sponsored by the Government Finance Officers Association in Minneapolis.

"It's not perfect, but it's a beginning," said Bateman, who has been collecting examples of some of the language that is starting to appear in official statements. "More issuers than in the past are feeling the need to respond to the concept of ongoing disclosure. Some are doing so in positive ways. Some are saying, 'I'm sorry, we're not going to respond.'"

"We've seen everything from straightforward statements that 'we will not engage in secondary market disclosure and have no plans to do so' to statements that 'we will engage in secondary market disclosure [and here are the details],'" Andrew Kintzinger, a partner with Briggs and Morgan in Minneapolis, said at the GFOA panel discussion in Minneapolis.

"Then there are statements that are more flexible," Kintzinger said. They might say that the issuer plans to provide continuing disclosure, but the terms and nature of that disclosure will be determined later when the SEC's new disclosure initiatives are finalized, said Kintzinger, who is president-elect of the National Association of Bond Lawyers.

Kintzinger was referring to the SEC's rule, proposed March 9, that 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.

"If the rule is implemented in its current form, before an underwriter could underwrite your issue, you would have to [pledge] to provide secondary market" disclosure, Kintzinger said in a telephone interview yesterday. He said that until such a rule is implemented, the interpretive release reminds issuers that it is good practice under the antifraud provisions to pledge ongoing disclosure. Also, the rule would apply only to new issues.

SEC officials have said that the rule could take effect fully only if information repositories with the capacity to accept a wave of bond documents are up and running.

"Some people are saying we are building a field of dreams," Robert Colby, SEC deputy director for market regulation, said at the Chicago disclosure conference.

"People don't know who's going to run these repositories. The repositories don't know how much information is going to come in, so they don't know what to do. We are not going to build a field of dreams on somebody else's land. If we don't know that it's going to work, we are not going to require it. There's a lot of pinning down that needs to be done," Colby said.

In the corporate securities arena, the SEC serves as the repository for issuer documents, Colby said. "We are expressly banned from doing that in the municipal securities market. So we are looking for another vehicle to make the information available promptly, he said.

"But there's all sorts of push and pull," he said. "The repositories don't know what they are prepared to do unless they know how much demand there is going to be for the documents. They don't know if it is worthwhile."

Nevertheless, issuers across the country are cautiously pledging to send documents to repositories. In a preliminary official statement last month, one university issuer whose identity was not available said, "Information is to be made public by the issuer or the trustee under the indenture by transmitting it to a repository."

The document makes clear that it will not be considered an event of default if the issuer fails to provide the information. Also, the arrangement can be modified without bondholders' consent, the official statement says. It says the issuer or the trustee can terminate or alter the arrangement by written notice, which must be made public.

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