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Regulation

EMMA Efforts Criticized

WASHINGTON - The first industry groups to comment on two Municipal Securities Rulemaking Board proposals tied to its EMMA disclosure system are warning that they may be unfair or unduly burdensome in certain respects.

Writing on behalf of nonprofit issuers, the National Association of Health and Educational Facilities Finance Authorities said it is concerned that one of the MSRB's proposals that would give special recognition on EMMA to issuers and obligors that agree to make four types of voluntary disclosures would likely create "prejudicial and unjustified marketplace distinctions" that would harm some borrowers that cannot comply with them.

"By introducing what amounts to a 'Gold Seal' or 'Good Housekeeping Seal of Approval,' these new voluntary undertakings could become de facto requirements which cannot be justified under the law as mandatory," Robert Donovan, executive director of the Rhode Island Health and Educational Building Corp., wrote on behalf of NAHEFFA.

The board's proposals would give special designation to issuers that: file annual financial information within 120 days of the end of their fiscal years, adhere to accounting standards established by the Governmental Accounting Standards Board, receive certificates of achievement from the Government Finance Officers Association, and link to investor relations or financial and operating information available elsewhere on the Web.

Meanwhile, both the Securities Industry and Financial Markets Association and the Regional Bond Dealers Association are raising concerns about a second MSRB proposal to alter its Rule G-32 on new-issue disclosures to require underwriters to disclose to EMMA whether and when an issuer or borrower has agreed to provide continuing disclosures as well as who will be providing that information on their behalf.

Specifically, RBDA believes that requiring underwriters to extract specified data from an issuer's continuing disclosure agreement, or CDA, and to copy it onto Form G-32 is "unnecessary" since it's already in the CDA, which is often included as an appendix to an official statement.

"We believe a better approach is to require that underwriters submit an electronic copy of the CDA to ... EMMA," RBDA wrote. "The CDA should be linked to the record of disclosure information associated with a particular bond issue in the same manner as the OS is currently available on the system."

Currently, Form G-32 requires underwriters to submit to the MSRB only such information as the issuer name and issue description, CUSIP number, principal amount, initial offering price, and expected closing date, among other items. This basic data, RBDA said, is needed to create the database record of the issue on EMMA. However, the additional data elements proposed by the MSRB "are not necessary" for creating an EMMA record, the RBDA argued.

In a separate letter, SIFMA is warning that with the exception of certain data, the G-32 proposal would become the first regulatory obligation to require any party to a muni offering to pluck information from an OS and stick it into another form of document. The move, SIFMA warned, would violate the integrity of the OS, as well as encourage investors not to read the entire OS.

Asked about the letters yesterday, MSRB executive director Lynnette Hotchkiss declined to comment on their specifics but said that they would be considered by the board along with any other comments on the proposals.

In NAHEFFA's four-page comment letter, Donovan warned that there are "serious problems" with the proposed voluntary issuer undertakings, including the "arbitrary" 120-day filing deadline for voluntary financial information that the group said is based on a "one-size-fits-all" approach that does not work for non-profits.

While Donovan said NAHEFFA is "enthusiastic" about the establishment of EMMA, too many nonprofits are unable to comply with the voluntary undertakings because they are not feasible or are too expensive, not because the borrowers lack a commitment to disclosure, he said. In the health sector, for example, many critical access hospitals had to prepare and obtain Medicare review of their "cost report" before finalizing their financial information, Donovan wrote.

"This mandated and uncontrollable outside government review may take a considerable period of time," he added, noting that this annual filing deadline may also be impossible for certain colleges that have a fiscal year ending in May or June but do not typically release financial statements until they are reviewed by a governing board that meets in the fall.

"The annual filing undertaking is infeasible for many nonprofits, and they should not be punished in the marketplace for failing to meet an unreasonable or unobtainable standard," Donovan added.

Donovan said NAHEFFA is concerned that an issuer could commit to meet the voluntary disclosures, advertise those undertakings on EMMA, but in reality fail to disclose them without consequences. In an additional comment letter, SIFMA raised a similar point, and requested guidance from the SEC on dealers' roles in disclosing compliance to investors.

Several other industry groups said yesterday that they plan to soon send their comments on the proposals. Susan Gaffney, director of the GFOA's federal liaison center here, said the issuer group's executive board will be meeting to discuss the MSRB's voluntary disclosure proposal in the next few days and will then submit comments on them.

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