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SEC Gets Feedback

WASHINGTON - The Securities and Exchange Commission should require credit rating agencies, rather than issuers, to send rating information about municipal securities directly to the Municipal Securities Rulemaking Board's EMMA system, issuers and bond attorneys argued last week.

In comment letters filed with the SEC, the Government Finance Officers Association and the National Association of Bond Lawyers both argued that it is unduly burdensome for issuers to provide timely notice of rating changes, often because of the frequency with which bond insurer ratings have changed in the past two years with little or no direct notice to issuers.

In addition, some bond issues are insured in the secondary market by the underwriter rather than the issuer, and the issuer may have no knowledge that the bond issue is susceptible to a downgrade because of a downgrade on the insurer, GFOA said.

Alan Anders

Both groups asked the SEC to revise the qualifications for nationally recognized statistical rating organizations so that they must file rating information directly with the MSRB's Electronic Municipal Market Access site, known as EMMA.

"NABL believes that this would establish a much more efficient and timely process for informing the market rather than doing so indirectly through the regulation of broker-dealers and ultimately relying on issuers and obligated persons, many of whom never receive notice of such rating changes," the bond attorneys wrote.

The comments were made in separate letters the groups filed with the SEC last week in response to its proposed changes to Rule 15c2-12 on disclosure.

The SEC proposed, among other things, that issuers disclose "rating changes" and other material events within 10 days of their occurrence. Currently, material event disclosures are required to be reported only on a "timely basis."

The GFOA and other issuers opposed the 10-day filing deadline, saying if the commission insists on it, it should begin when the issuer learns of the event.

Alan Anders, New York City's deputy director for finance and a member of the GFOA debt committee, said in a brief interview Friday said that the disclosure of rating changes is especially burdensome for smaller issuers that don't have the resources to monitor the extensive lists rating agencies release with hundreds or even thousands of securities affected by insurance downgrades. He stressed that he was speaking only for himself and not for New York City or the GFOA.

MSRB executive director Lynnette Hotchkiss said that it would be feasible for EMMA to accommodate rating information from the credit agencies, and that the board will consider this among other suggested enhancements to the system.

At a conference in New York last week, she said that market participants suggested 10-years worth of enhancements to EMMA.

Asked about the idea on Friday, spokespersons for Standard & Poor's, Moody's Investors Service and Fitch Ratings either declined, or could not be reached for, comment.

Market participants have said that while it would be relatively easy to send rating information to the board, there are several difficult legal issues that would first need to be resolved, such as whether the MSRB would be liable for inaccurate ratings that investors relied upon in purchasing securities.

NABL raised concerns about the ambiguity created by the SEC's proposed application of secondary market, but not primary market, disclosure requirements to variable-rate demand obligations.

Removing the VRDO exemption from secondary market requirements is not necessary because owners of such securities protect themselves by availing themselves of the puts if disclosures are not provided voluntarily, the bond attorneys argued.

However, if the SEC is intent on applying secondary market disclosure requirements to VRDOs, there could be confusion because VRDO issuers are not required to put continuing disclosure agreements in officials statements and broker-dealers are not required to review the OS before the securities are issued in the primary market.

"If the commission adopts the proposed amendment, it should clarify whether or not it intends effectively to prohibit the now-common practice of offering LOC-backed demand securities without either initial or continuing disclosure on the underlying credit," NABL wrote.

NABL also is asking for clarification about the meaning of interpretive guidance issued with the proposed rule changes intended to assist muni issuers and broker-dealers in preventing securities fraud.

Specifically, the guidance casts doubt on whether an underwriter could form a reasonable basis for relying on an issuer's disclosure representations if the issuer has a history of "persistent and material breaches or has not remedied such past failures by the time the offering commences."

But, NABL said, if an issuer has a history of failing to adhere to its continuing obligations, an underwriter can satisfy its duties by assuring that the noncompliance is remedied and adequately disclosed.

Both NABL and GFOA also argued that the SEC greatly underestimated the impact of its proposed rule changes on issuers, and suggested that commission staff recompute and resubmit its impact estimates for further review.

"While each new event or trigger may not be onerous, the SEC has significantly underestimated the estimated time needed by issuers to prepare documents and comply with the requirements collectively," the GFOA said in its letter.

NABL also argued that the removal of the VRDO exemptions, coupled with the proposals' removal of a materiality determination for some events, may lead to unnecessary or unanticipated event notice filings.

For example, for a VRDO backed by a letter of credit, NABL said the proposal would require an event notice be filed in the event of an unscheduled draw on debt service reserves that reflected financial difficulties of the borrower, even if it was not material to an investor in the securities because the VRDOS were trading on the strength of a bank LOC.

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