ATLANTA -- South Carolina Gov. Carroll A. Campbell Jr. last Thursday signed groundbreaking legislation that will require municipal issuers to commit to ongoing secondary market disclosure before they can sell bonds.
According to state Treasurer Grady Patterson, the law is the first of its kind in the nation. The law becomes effective Sept. 1 and applies to bonds issued after that date.
"We think this is good for South Carolina and will serve as a pattern for other states," Patterson said Friday in an interview. He said he is aware of no opposition from any local issuer.
Senate Bill 1182, which was passed by the legislature in May, requires that a local government planning to sell debt must include within its "issuing indenture, ordinance or resolution a covenant promising that it will file information with a central repository for availability in the secondary market when requested."
Patterson said that South Carolina may eventually set up its own repository. In the meantime, the bill would be satisfied by registration with any of the three existing repositories, he said.
Currently, The Bond Buyer, J.J. Kenny Co., and Bloomberg Financial Markets accept issuers' official statements and event notices and make them available to market participants.
"We have left it completely open whether or not we will set one up here," Patterson said. "But given the need for states to be involved in the process, it might not be a bad idea."
New York State recently became the first state to hold public hearings on the issue of setting up its own repository. In Texas last month, the Municipal Advisory Council indicated that it is considering establishing a statewide repository.
Under the bill signed by Campbell, each issuer in South Carolina would be required to provide an "annual independent audit within thirty days of the issuer's receipt of the audit" and "event specific information, within thirty days of an event adversely affecting more than 5% of revenue or its tax base."
In March, the Securities and Exchange Commission proposed a rule change that would bar dealers from underwriting bonds unless the issuer has provided a written pledge of ongoing disclosure to a nationally recognized repository. The disclosure would include annual audited financial statements.
The commission's proposed rule also says that dealers must "review" the information that issuers have pledged to provide before they recommend to their secondary market customers that they buy or sell bonds.
The SEC has also proposed a legal interpretation defining the way that municipal market participants can better meet disclosure requirements under the antifraud provisions of the federal securities laws. Areas singled out include disclosure of an issuer's financial condition and the results of operations and cash flows. The SEC said the interpretive release is in effect, although the agency is accepting comments on the document until July 15.
The municipal industry has given strong support to an approach to a secondary market disclosure standard that would compel issuers to commit to providing information. In a joint statement issued Dec. 20, 12 key industry groups proposed that the SEC bar bond dealers from underwriting the municipal debt of issuers who do not pledge to provide ongoing disclosure. The groups also proposed that dealers be required to disclose to investors "any information in their possession" about whether the issuer has committed to provide ongoing information.
In addition, they asked that dealers be forced to disclose whether a bond is rated and, if so, what that rating is.
The groups participating in the effort included the Government Finance Officers Association, the National Assoication of Bond Lawyers, the National Association of State Treasurers, the National Federal of Municipal Analysts, and the Public Securities Association.