Trustee task force rejoins disclosure debate, says banks must be paid for higher standards.

WASHINGTON -- Improving secondary market disclosure in the municipal market is an important goal, but it will not come cheap, bond trustees are about to tell federal regulators.

"Trustees want to be paid reasonable fees and expenses" for their role in the process, said Jeffrey Powell, co-chairman of a new American Bankers Association task force. The group plans to spell out bond trustees' concerns to the Securities and Exchange Commission as the agency fashions standards for ongoing disclosure in the coming months.

"Regulators are going to [develop standards, and] it's quite clear that there is going to be a cost," Powell said "Who is going to pay the bill for this? Trustees are going to be involved. We should not be forced to provide information that we are not going to be compensated for."

SEC officials met behind closed doors Oct. 20 with roughly 25 representatives of the municipal bond industry to begin crafting a secondary market disclosure standard. The bankers' group, which in 1991 called for a comprehensive voluntary plan for improving ongoing disclosure, was not represented at the meeting, sponsored by the SEC's corporation finance division.

But Powell, vice president of Harris Trust and Savings Bank in Chicago, said bankers are determined to make their views known as talks between the SEC and market players proceed. He said the association's corporate trust committee will meet Nov. 17 to appoint a task force to be headed by Powell and Anthony Guthrie, managing principal of corporate and institutional trust services for Reliance Trust Co. in Atlanta.

"This is a price-sensitive business," Powell said of municipal trust departments. "Any added pressure on the razor-thin pricing we currently have is of great concern in providing service. Depending on the depth of the information that parties want to be disclosed, it could be costly."

For instance, ferreting out delinquency information for bond-financed housing projects can be time-consuming, Powell said. "The SEC could require the issuer to provide such information, but in many cases we supply it. It should be stated right in the bond documents that trustees get reasonable fees and expenses" for such work, he said.

"We have to be at the forefront in developing standards," said Anthony Guthrie. "I think the SEC understands the role of the corporate trustee."

Taking an activist role on secondary market disclosure is nothing new for bond trustees.

In 1991, the corporate trust panel devised a voluntary plan for improving ongoing disclosure. Few issuers tried the system, in part because of the fees involved, but the plan is expected to get new scrutiny as regulators search for ways to increase what SEC Chairman Arthur Levitt recently called the "almost negligible" secondary market disclosure in the municipal market.

"We worked so hard to come up with the guidelines," said Powell, referring to the months of negotiation between trustees and market participants, particularly bond lawyers. "We are going to reinsert ourself into the process. Now it's time to go forward."

Introduced in two parts in November 1990 and February 1991, the guidelines call on trustees and issuers to spell out in indenture agreements exactly what continuing disclosures trustees may release to the market.

Examples offered in guidelines include audited annual financial statements and quarterly updates, draws on reserve funds, events of default, material investment losses, challenges to the tax-exempt status of the bonds, change of trustee or credit enhancer, calls, unscheduled draws on credit enhancements, or failure of a third-party guarantor to perform.

The guidelines also urge issuers to write side agreements to existing indentures for billions of dollars of outstanding municipal bonds that would spell out what trustees can disclose. Issuers would fill out a "direction and indemnification" form that would list the types of financial reports that could be released and events that could affect the issue.

The bankers guidelines were developed jointly with the National Association of Bond Lawyers, which raised major objections to an earlier draft of the standards. Those guidelines listed 16 events that trustees should report without necessarily getting authorization first from issuers. Lawyers warned that the system gave trustees too much authority and also exposed trustees to bondholders' lawsuits if the bonds run into trouble.

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