ORLANDO - States should increase their efforts to prevent abusive vendor lease financings, but strong federal regulation may also be needed, participants at a debt managers conference said here yesterday.
The participants noted that questionable deals continue apace, despite the best efforts of some states to curb them.
New Jersey, for example, recently encountered a troublesome deal in which a state vendor lease contract with a cancellation clause was sold to investors without proper disclosures, said Larry Singer, vice president of Fairmount Capital Advisors and former finance director of the state.
Mr. Singer was the keynote speaker at the State Debt Management Network conference.
When the state exercised its right to cancel the lease for nonperformance by the vendor, disgruntled investors responded with a letter threatening to sue the state for nonpayment, he said. The dealers who had remarketed the lease, whom he did not identify, never informed the investors about the state's cancellation rights, he said.
This is only the latest evidence that unauthorized or botched vendor financings are recurring despite New Jersey's and other states' efforts to be vigilant against such deals, Mr. Singer said. A bond attorney in Washington State said that state recently encountered another unauthorized deal despite its law prohibiting such deals.
Mr. Singer said that since the resale of vendor lease contracts is legal and as yet largely unregulated, states should at least include terms in those contracts to cut down on abusive deals.
These would include disclaimers against any claims by dealers that the lease payments are eligible for federal or state tax exemption, statements that the state is not responsible for passing through the lease payments to investors, and warnings that the state is not responsible for the disclosures or lack of disclosures by dealers, he said.
But beyond these steps that issuers can take to protect themselves, certain minimum disclosuure requirements should be imposed on vendor dealers to protect buyers, he said.
The disclosures would include the labeling of vendor lease offerings as "secondary sales" on the cover page of offering documents and explanations about the pass-through mechanisms for lease payments and any terms for early termination, he said.
New disclosure requirements, wherever called for, should be imposed by the Municipal Securities Rulemaking Board and enforced by the National Association of Securities Dealers, said Richard Geltman, executive director of the Public Securities Association.
"The MSRB should be looking into this." he said. "If this is a remarketing or a reissuance" of a state lease contract. "shouldn't it be regulated by the MSRB?" he asked.
MSRB officials were not present at the conference, but one MSRB source previously said the agency prefers to address any vendor lease problems existing disclosure rules.
Mr. Singer urged the other state debt managers not to "overreact" to abuses they uncover by simply outlawing vendor lease financings altogether. Rather, he said, the problem should be "managed" through various controls established by the state and federal governments,
"The tendency is to be really out-raged," he said. "But I don't think it's that much of an issue. There is no one better suited to get the process under control than the debt managers."
Mary L. Landrieu, Louisiana's treasurer and chairwoman of the state network, agreed that it is best for states to adopt policies that warn buyers of the potential pitfalls of vendor deals, but not try to stop them altogether. "If you say, ~let the buyer beware' through some form of disclosure, then they know what they're getting into," she said.
But others at the conference said stronger measures may be warranted. Steve Juarez, executive secretary of the California Debt Advisory Commission, said that because abusive vendor deals often have been hard for issuers to even detect, much less control, some might want to consider prohibiting them.
Another participant told Mr. Singer she had "trouble heeding your advice" not to overreact. "It seems like such a terrible abuse, advertising a tax exemption for securities with no public benefit," she said.
