NFMA Is Optimistic on Disclosure

WASHINGTON — While the National Federation of Municipal Analysts is willing to work with issuer and other market groups to promote improvements to the timeliness and quality of municipal disclosure, additional changes to the current regulations are crucial to ensure their adoption throughout the market, the NFMA’s new chairman said last week.

Mark Stockwell, vice president and head of municipal research at PNC Capital Advisors in Philadelphia, took over the helm of the industry group earlier this month.

He stressed in a lengthy interview that the NFMA is engaged in discussions with issuers to move forward with the debate on improvements in disclosure standards.

But because such improvements will not necessarily cover the most worrisome issuers, several improvements to disclosure — especially for variable-rate demand obligations and swaps ­— should be included in the Securities and Exchange Commission’s proposed changes to its Rule 15c2-12 on disclosure, he said.

“A lot of issuers say they’re doing the stuff we’re asking for anyway, but what happens when we get to the cuspier credits and the question is, what’s the stick for them?” Stockwell asked.

Without changes to the rule, it does not exist, he said.

Stockwell’s remarks come as the SEC is sifting through comments to its July proposal that would generally expand the types of disclosures issuers must make on a continuing basis, including a repeal of a long-held exemption for VRDOs.

The proposal, which could be voted on by the SEC as early as next month, also would add four new categories of event disclosures, such as a change in the trustee, and require that nine of 15 specified events be disclosed whenever they occur. Six types of events would have to be disclosed if deemed material.

The proposal also would require that issuers disclose an event’s occurrence within 10 business days rather than on “a timely basis.”

Though the NFMA supports the changes, it argues that they should go further, including a requirement to disclose of the termination of a VRDO liquidity facility if its removal essentially transforms the security into long-term debt.

Better VRDO disclosure is of “the utmost importance,” Stockwell said, because short-term securities could present “enterprise risks” to the money market funds that purchase them if not all of the important details are disclosed in the securities’ documents and if the funds do not receive timely material information about them.

“Without that information, there’s a lot of risk out there,” he said.

While VRDOs typically are wrapped with either letters of credit or standby bond purchase agreements that guarantee an investor can sell them on short notice, termination events are difficult for analysts to follow unless they are clearly spelled out in official statements and the securities are subject to continuing disclosures, according to Stockwell.

“A lot of folks think, 'OK, you have a letter of credit, just rely on the bank,’” he said. “But for those liquidity agreements that have termination events, an analyst needs to be able to access financial information on the underlying credit to ensure comfort that the termination provisions will not be exercised.”

In addition to better disclosure of VRDO liquidity agreements, the NFMA would like the SEC to require event disclosures when an issuer commits either to enter into a swap or swaption or posts collateral for a swap in certain situations, as well as when unremarketable VRDOs become bank bonds.

Though issuers claim the costs of additional federal regulation generally outweigh the benefits, Stockwell contends the reverse is true: the costs of not providing these disclosures is more harmful. He cited as illustration the general trading spreads among different issuers of Build America Bonds last year.

“There is a cost of not providing disclosure,” he said. “Especially in late 2008 and early 2009, unless you were a high grade, yield spreads spread out exorbitantly, and you saw that especially with the introduction of Build America Bonds into the market.”

While the NFMA would like to see quarterly financial information from issuers, it is not asking for quarterly audits. Instead, the group would like to see more frequent disclosure of such information similar to the monthly tax collections that many states provide now.

“It’s something that they’re doing anyway,” Stockwell said. “If you’re a chief financial officer of [an issuer], if you don’t know what’s going on and you don’t have that in an Excel spreadsheet or you’re not keeping your board up to date, I think your tenure as the finance officer is going to be short.”

Stockwell said he is optimistic that, at the very least, issuer groups will support such efforts voluntarily because they will see “the reasonableness of the information that we’re asking for.”

“But to me, the issue is, are you willing to step up and say, 'This should be part of 15c2-12.’ ” he said.

While issuer groups generally are opposed to federally imposed changes, there has been progress in recent weeks. Numerous participants at a Municipal Securities Rulemaking Board roundtable of market participants earlier this month said it generated a constructive dialogue on disclosure.

Stockwell, who attended the gathering, said he presented the NFMA’s general view that disclosure needs to improve as well as specific proposals on VRDOs and swaps. He said there were productive discussions with other members of the roundtable.

The discussion between issuers and the NFMA appeared to take a new turn last summer, after the federation sent a letter to key lawmakers and SEC officials that said analysts have struggled to unravel the details of a number of different transactions since the financial crisis began, particularly with interest rate swaps.

“For interest rate swaps and similar instruments, simply being able to track exposure to troubled counterparties is a time-consuming, frustrating, and often fruitless effort,” the letter said.

“The structure of a swap, the counterparties involved, and in particular a transaction’s terms and triggers are often not disclosed to investors. For example, it was not readily clear which borrowers had interest rate caps on auction-rate bonds.”

That particular portion of the letter has met with apparent support from some issuer officials, including Frank Hoadley, chairman of the Government Finance Officers Association’s debt committee and Wisconsin’s capital finance director.

At the GFOA’s annual meeting last summer, Hoadley said the NFMA was raising “some legitimate issues” about the hoops analysts must jump through to find information about an issuer’s exposure to counterparty risk in derivatives ­transactions.

Hoadley said yesterday that the GFOA debt committee plans to discuss its own disclosure best-practices document at its winter meeting here next week. The discussion will include whether to incorporate some of the specific comments the NFMA made about VRDOs and swaps.

Aside from the focus on regulatory changes, Stockwell said NFMA members will spend a lot of energy this year updating four existing disclosure best-practices documents, which Stockwell said he sees as industry standards that are as symbolic of the NFMA as the Golden Gate Bridge is to San Francisco.

“Like any bridge, those best-practice documents need maintenance” because they have not been updated in some time, he said.

Specifically, the NFMA’s disclosure committee plans to revise housing disclosure recommendations last updated in 2000, a health care best-practice document that has not been updated since 2005, and disclosure recommendations issued for land-backed bonds in 2000 and for swaps in 2004.

In addition, the industry group is working on new best practices for disclosure of general obligation debt and dedicated-tax bonds.

 Though both categories of debt are backed by taxes, they consist of different structures that demand different types of information for analysts. Dedicated-tax bonds would include highway revenue bonds and sales tax bonds, such as ­California’s economic recovery bonds.

“We think that the structures of those bonds are different [from GOs] so they need their own recommended best practices for disclosure,” Stockwell said. “In terms of disclosure, it’s not one size fits all.”

Raised in California, Stockwell got his start in public finance as a fiscal consultant for cities on tax-allocation and tax-increment bonds, working for 12 years in Los Angeles and Sacramento at Katz Hollis.

He later spent two years in Minneapolis as a financial adviser for state and local governments at Evensen Dodge, now part of Public Financial Management, before moving to suburban Philadelphia in 1996 to work at Vanguard Group Inc. as a senior municipal bond analyst, where he was later promoted to a principal.

At PNC, where Stockwell has worked since 2002, he “has a typical analyst’s office,” with stacks of marked-up official statements.

In addition to his managerial duties, Stockwell covers California and Western tax-backed issues, as well as Puerto Rico, Pennsylvania, public power and, finally, toll roads because, he jokes, “I have nothing else to do.”

Stockwell has dual majors from Westmont College in political science and economics and master’s degrees in public administration and urban planning from the University of Southern California.

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