NABL: Proposals Could Mislead

WASHINGTON — The National Association of Bond Lawyers is questioning whether a Municipal Securities Rulemaking Board proposal to specially designate issuers that undertake any of four types of voluntary initiatives may have the unintended effect of misleading investors about the creditworthiness of the issuers' securities.

In a seven-page comment letter filed with the Securities and Exchange Commission late Friday, NABL was particularly concerned about two of the four voluntary undertakings. The group warned that giving prominence to issuers on the MSRB's EMMA system that either adhere to generally accepted accounting principles established by the Governmental Accounting Standards Board, or receive certificates of achievement from the Government Finance Officers Association, "could lead investors to form mistaken impressions regarding the soundness or quality of the disclosure available for [their] municipal securities."

"NABL is concerned that by prominently highlighting certain voluntary undertakings, the MSRB could be construed to have recommended the creditworthiness of the associate municipal securities," wrote members of an ad hoc subcommittee of NABL's securities law and disclosure committee, both of which are chaired by William Hirata, a partner at Parker Poe Adams & Bernstein LLP in Charlotte.

The NABL panel also commented on a related MSRB proposal to change its Rule G-32 on new-issue disclosures. The G-32 changes would 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.

Both the voluntary disclosure and G-32 proposals were submitted to the SEC by the MSRB last month in conjunction with the commission's consideration of changes to its Rule 15c2-12 on disclosure that would expand and strengthen to types of events issuers must report to EMMA. The proposed SEC rule changes also would require that the event notices be disclosed within 10 days from when they occur.

The NABL panel said the SEC should defer adding additional voluntary submissions by issuers until after the proposed 15c2-12 amendments are considered and adopted, arguing that it is confusing for market participants to understand the added levels of responsibility and liability that might be borne by the proposals without "appropriate due process safeguards." A delay in the consideration of the MSRB proposals would allow for "an orderly integration" of the 15c2-12 changes with any additional voluntary EMMA submissions, it said.

Though the comment due dates were much earlier for the MSRB proposals - technically, they were due on Wednesday - SEC staff have said they will accept comments on all of the proposals until the five-member commission has acted on them, which is expected to be late September at the earliest. SEC staff have also said they plan to consider comments on the MSRB proposals at the same time they take up comments on the 15c2-12 changes.

Turning to the voluntary disclosure undertakings, NABL said that even if a governmental issuer is in compliance with GASB-GAAP standards, an auditor's report affirming that status is not an opinion on the financial health of the entity. It "simply provides a review as to whether the entity followed the rules of accounting and reporting, not whether finances have been managed properly," NABL wrote.

"Conversely, otherwise sound credits which follow a state statutory basis for accounting, such as many local governments in New Jersey, may be stigmatized as being less creditworthy simply because they do not have the GASB-GAAP undertaking disclosed on the EMMA Web portal."

Meanwhile, the GFOA certificate of achievement program recognizes the quality of the issuer's application of accounting principles, "and does not appear to be an affirmation of the creditworthiness of the entity requesting the certificate," the NABL group wrote. The panel quoted a portion of the GFOA Web site that described the certificate program as a way to "encourage and assist state and local government to go beyond the minimum requirements of generally accepted accounting principles ... and then to recognize individual governments that succeeded in achieving that goal."

On the proposed G-32 changes, NABL asked for several clarifications from the SEC, including whether the MSRB's proposal would not alter an existing "reasonable determination" standard that an issuer has agreed to make continuing disclosures under 15c2-12.

The NABL group also asked the SEC to clarify that Form G-32 need only include the name of any obligated person other than the issuer that would be providing continuing disclosures, rather that all obligated persons regardless of whether they will be providing such disclosures.

Meanwhile, the bond attorney group recommended that the MSRB elaborate how its G-32 proposal would promote a free and open market, something it suggested might be necessary to shield the proposal from possible legal challenges.

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