WASHINGTON - A group of municipal analysts is urging the Securities and Exchange Commission to require muni issuers to file with EMMA certain material event notices related to swaps, bank bonds, and liquidity facilities. But issuers and borrowers are warning that the proposed 10-day deadline for filing material event notices would be difficult or impossible to meet and are pushing for 30 days instead.
The groups and municipalities are making their warnings and requests to the SEC in comment letters about the commission's proposals to tighten its Rule 15c2-12 to improve the timeliness and quality of municipal disclosure.
The proposed changes to the rule would require issuers to file notices of material events within 10 days of when an event occurred. They also would expand the number of events that must be disclosed and require some events to be disclosed regardless of whether they would be material to investors. Materiality generally is defined as information an investor would want to know before deciding to buy or sell securities.
In addition, the rule would require issuers to meet continuing disclosure requirements for variable rate demand obligations.
Broker-dealer groups, while supporting many of the SEC's plans, are concerned about a seeming disconnect in the proposal to require secondary market but not primary market disclosure for variable-rate demand obligations. They also want to know if a remarketing of VRDOs would constitute a primary offering.
The Securities Industry and Financial Markets Association also urged the SEC to continue to allow issuers to disclose tax events only when they are material to investors. The SEC's proposals would require the disclosure of any IRS preliminary, proposed or final determinations of taxability of bonds, regardless of materiality.
The Regional Bond Dealers Association is urging the SEC to come up with an alternative to requiring underwriters to review issuers' compliance with their continuing disclosure agreements, which it said "is burdensome and costly." The SEC should explore allowing underwriters to rely on an issuer's representation that it is in compliance with its disclosure commitments, the group said.
In its four-page letter, the National Federation of Municipal Analysts, which is made up of about 1,000 credit analysts and portfolios mangers in the muni market, supported most of the SEC's proposed changes but urged the commission to expand the list of events for which issuers must file material event notices. The letter was signed by executive director Lisa Good.
The NFMA said issuers should disclose any commitment to enter into a swap or swaption, as well as the counterparty, the dollar amount and maturity of the contract, the timing of bond issuance under a swaption, the rate formulas for each counterparty, the events under which the contract can be terminated, and any payments an issuer receives for entering into a swaption.
The group also wants issuers to disclose when they must post collateral for a swap because of either a downgrade of their or their credit enhancer's ratings or the negative mark-to-market value of the swap exceeded a certain threshold.
"The posting of collateral may have a significant effect on the issuer's liquidity that would not otherwise be reported until the next release of financial information, which, for many issuers, may be 270 or more days after the end of their fiscal year," the NFMA told the SEC.
The group also urged that issuers be required to file material event notices regarding the commencement and terms of any transaction related to a conversion of "bank bonds" to a loan or term note with a bank. "The conversion of bank bonds to a term note or loan effectively accelerates the repayment of long-term debt to a short-term ... obligation that may have a negative impact on the issuer's financial condition," the group said.
Issuers also should file notices when the termination of a conditional liquidity facility results in the transformation of the security to long-term debt, the NFMA told the SEC.
"As part of its structure a demand security with a liquidity facility which is conditional in nature includes a list of events which trigger its termination either immediately or after a specified period of time," it said. "After the termination is effected, the demand component of the security no longer exists and the investor then holds a long-term security."
The NFMA also urged the SEC to continue to work toward making issuers file annual financial and operating information on a timelier basis. Some issuers do not make such filings until nine months after the end of their fiscal years. "After the turmoil in the financial markets, which occurred over the past two years, the NFMA believes more firmly than ever that more rapid financial disclosure is critical to investors in the municipal market," the letter said.
But several issuers and borrowers opposed the SEC's proposal to require issuers to file material event notices within 10 days of when events occur and urged the commission to relax the deadline to 30 days.
The 10-day deadline "would impose onerous and, in some instances, unachievable burdens on issuers and [borrowers] related to monitoring and preparing filings for these events," the National Association of Health and Educational Facilities Finance Authorities warned in a five-page comment letter signed by Robert Donovan, executive director of the Rhode Island Health and Educational Building Corp.
The 10-day deadline "is setting up many charities for failure" because they must report on external events "that are not within the control of, or the direct knowledge of, educational or health care entities," according to the NAHEFFA, which represents more than 40 authorities that issue tax-exempt bonds on behalf of nonprofit organizations in education and health care.
The group cited rating changes as an example, saying borrowers may not be notified of them in time to disclose them within a material event notice within 10 days. Another example would be appointments of new or additional trustees to bond issues, it said.
"The turmoil in the banking sector has meant frequent changes in trustees," the letter said. "Many issuers and [borrowers] are not informed of these changes within the proposed 10-day timeframe, much less in sufficient time to identify the need to file a notice and prepare the ... notice within such time period."
Kenneth Rust, the chief administrative officer for Portland, Ore., and Eric Johansen, the city's debt manager, also warned the SEC that "10 business days is simply too aggressive of a timeframe for such notification to occur." A 30-day timeframe would be more reasonable, they said.
Glenn Byers, assistant treasurer and tax collector for public finance and investments in Los Angeles, told the SEC that he opposes the 10-day deadline, particularly for notices about rating changes.
"Beginning in 2007, obtaining relevant and specific rating change information from rating agencies has become highly burdensome due to the mass rating changes that resulted from downgrades of municipal bonds with insurance credit enhancement," he said. "Adding a 10-day issuer reporting requirement surely will compound that burden - to an extent that may well impede compliance for many issuers."
On the issue of VRDOs, SIFMA, in a five-page letter signed by managing director and associate general counsel Leon Bijou, said that while applying secondary market disclosure requirements to VRDOs "is a positive development ... Not requiring that underwriters review a deemed final official statement ... suggests that some continuing disclosure information may not be material for investors at the initial issuance of the demand securities."
RBDA agreed, but went further, saying: "We urge the SEC to explore reasonable changes to 15c2-12 that would apply primary market disclosure rules to VRDOs ... without triggering the need [for underwriters] to obtain, review and distribute OS' on each reset date." The three-page letter was signed by RBDA co-chief executive officers Michael Decker and Mike Nicholas.
