WASHINGTON The Securities and Exchange Commission's final secondary market disclosure rules are a major improvement over the proposed rules, but may still cause trauma for some lssuers, bond market participants said this week.
"They are a lot better than they were, but I still think they are going to have a fairly traumatic impact on some folks," said Milton Wells, director of the National Association of State Treasurers' office of federal relations.
"There are a whole lot of issuers out there that have more than $10 million of bonds outstanding that haven't focused on this. They're going to be surprised. You may hear a lot of squawking from them," Wells said. The SEC rules generally apply to lssuers that have more than $10 million of municipal bonds outstanding.
"I think the commission deserves some praise for trying to accommodate the needs of both market participants and investors," said Gerald LaPorte, a lawyer with Patton Boggs in Washington.
"But for some of the smaller issuers, there's still going to be some lack of understanding about why they have to make financial information available to the marketplace," he said.
LaPorte said that the burdens of complying with the rules "are going to be significant" for borrowers who are not accustomed to providing such information.
John Gardner, a lawyer with Batlard Spahr Andrews & Ingersoll in Denver, said that while the primary market disclosure rules the SEC adopted in 1989 essentially codified market practices, these secondary market disclosure rules will foster major changes in the market. "This is quite different. It's a big step," he said.
Frank Shafroth, director of the center for policy and federal regulations for the National League of Cities, said the rules will be a burden for many local issuers.
"I'm really bothered that here' s an agency whose job is to protect investors, but bears no responsibility whatsoever to protect taxpayers," he said. "The one thing that we've asked them for from day one was, 'Whatever it is you're going to require, let's look at it and figure out what the costs will be and then measure what the benefit is in additional protections to investors.'"
Shafroth questioned the benefits of the rules, given that general obligation and revenue bonds rarely default.
Ilene Lieberman, the mayor of Lauderhill, Fla., a member of the National League of Cities, agreed. "Our concern is that some of the rules will add to the cost of issuing bonds," she said.
Lieberman worries that city officials will have to do more monitoring and generate more documents. She also fears the city may have to pay more for credit enhancement if it is now liable for failing to disclose information on a timely basis.
But Steve Jaffrey, executive director of the Vermont League of Cities and Towns, another National League of Cities member, said he's happy with the rules because 243 out of 246 member-towns have less than $10 million in bonds outstanding and will be exempt from the rules' main requirements.. "I think they've come out with something we can live with," he said.
Catherine Spain, director of the Government Finance Officers Association's federal liaison center, however, worries many small issuers that qualify for that exemption may mistakenly believe they have no disclosure reponsibilities. Small issuers need to be reminded that, to qualify for the exemption, they have to provide available annual financial information to the public upon request or to state information depositories.
Spain and Wells said the rules should not be much of a burden for most states and other large issuers.
These issuers will probably be able to satisfy the rules' annual information requirement by submitting comprehensive annual financial reports to the nationally recognized repositories, they said. Such reports typically cover not only the state or large city but affiliated entities.
But Ballard Spahr's Gardner said such reports do not always contain key information that is in the official statement, such as demographic data. The rules require annual updates of key finanical and operating information in official statements of primary offerings.
Gardner said he is concerned that the SEC expects issuers and other market participants to annually duplicate the efforts they go through to come up with the information in the official statement.
"For that to continue on sort of an annual basis is going to be difficult for a lot of issuers," he said.
Several market participants have specific concerns or questions about the rules.
Richard Ciccarone, an executive vice president with Kemper Securities Inc. in Chicago, said the SEC release explaining the rules suggests that analysts and broker-dealers may have more potential liability. with regard to material events than the rules suggest.
The rules suggest there are 11 possible events that could be material for which issuers would have to submit notices to repositories or the Municipal Securities Rulemaking Board. But the SEC release states, "The determination of whether other events also should be the subject of notification pursuant to the information undertaking is left to the parties." The "undertaking" is the issuer's or obligor's written agreement to provide ongoing disclosure.
Cathy Callender, a vice president for corporate communications and client relations with McGraw-Hill Finance Information Services Group, questions the meaning of "timely," given that the rules require "timely" notification of material events.
Christopher Taylor, the MSRB's executive director, said the MSRB has a 15-minute turnaround time for such notices under the parameters for the board's Continuing Disclosure Information program that were approved by the SEC. Issuers are expected to send such notices to the MSRB rather than to each nationally-recognized repository.
Robert Fippinger, a lawyer with Orrick, Herrington & Sutcliffe in New York, said "it is disappointing" that the SEC did not modify its previously-issued interpretative release on disclosure to bring it in line with the final secondary market disclosure rules. The release, which was issued last March along with the proposed secondary market disclosure rules, describes market participants' legal disclosure responsibilities and recommends areas for improvement.
"The overall impression is that the Interpretative Release has questionable validity as an interpretation of existing law," he said.
But some market participants had very positive things to say about the rules.
Ballard Spahr's Gardner said "one of the biggest pluses" about the rules is that they allow market participants to refer to, rather than actually provide, certain financial information, that is available elsewhere, such as an annual financial report for a corporate borrower.
Relmond Van Daniker, executive director of the National Association of State Auditors, Comptrollers and Treasurers, said "We're generally pleased with the very positive go-ahead signal from the SEC on state-based depositories." The rules reqmre issuers to submit information to any depository in the state where the bonds are issued.
Richard Lehrnann, president of the Bond Investors Association, said he was pleased that the SEC was suggesting lssuers put written agreements to provide ongoing disclosure in the bond indenture so the trustee would be forced to enforce the agreement. Without that kind of penalty situation, he said, the bondholders would be punished for the issuer's failure to provide ongoing disclosure.
Most market participants said they are now focusing on how the mechan-. its of the rules and how the nationally recognized municipal securities information repositories, or NRMSIRs, will gear up to provide information to the marketplace.
Officials with all of the three current repositories -- Kenny Information Services, Bloomberg Finance Markets, and The Bond Buyer said they plan to reapply to the SEC to become NRMSIRs under the final rules.
Meanwhile, several municipal market groups are planning seminars and conferences to help educate state and local Esuers and others about the rule's requirements.
The Council of Development Finance Agencies will discuss the disclosure rules at its annual meeting in New Orleans which is scheduled for Nov. 30 to Dec. 2.
The Public Securities Association plans to bold a conference in New York City on Dec. 8 at which SEC chairman Arthur Levitt is scheduled to speak.
The National Association of Bond Lawyers's planning a conerence in Chicago on Jan. 12.
The Government Finance Officers Association is considering putting together a video conference that would allow members via satellite to talk to SEC officials about the rules.
The Council of Infrastructure Financing Authorities, which issued a statement praising the rules at its annual meeting in Portland, Ore. earlier this week, said it will work with its members, particularly those associated with pool financings, to come up with disclosure criteria for complying with the rules.
