The remarks came during an all-day meeting of the Government Finance Officers Association’s committee on governmental debt management.
“I think the problem is obvious,” said Frank Hoadley, capital finance director of Wisconsin. “We’re being hammered from all sides — the SEC, the bond investor community, and the political side — about the quality and frequency of our disclosure.”
Issuers convened here amid a surge of regulatory and industry interest in muni market disclosure. Even the conference title, “Navigating the New Normal in Government Finance,” hinted at the heightened scrutiny the municipal securities market has attracted since the financial crisis.
Last year, the Securities and Exchange Commission launched a muni market review, with a report targeted for release later this year that may recommend legislative or regulatory changes. The SEC is updating its 1994 interpretive guidance on the continuing disclosure obligations of municipal issuers. And in a speech earlier this month, SEC commissioner Elisse Walter said the agency should seek authority from Congress to set “basic disclosure standards” in the primary and secondary markets.
In addition, the National Federation of Municipal Analysts and GFOA are working on best-practice disclosure documents for general obligation debt and dedicated-tax bonds.
“I’d far prefer to be working voluntarily with the NFMA at this point than be working involuntarily with the SEC,” Hoadley said.
As context for his comments, Hoadley cited a perception among some regulators and market participants that many issuers do not comply with continuing disclosure agreements.
“The number is certainly big enough that you can’t ignore it,” he said.
SEC Rule 15c2-12 prohibits broker-dealers from underwriting municipal securities unless an issuer contractually agrees to adhere to the rule, which requires issuers to file financial and operating information annually and material-event notices as they occur with the Municipal Securities Rulemaking Board.
Hoadley also cited a desire among investors and analysts, including the NFMA, for more frequent interim disclosure.
During a 90-minute discussion of disclosure issues, Hoadley asked whether the GFOA debt committee should revise its best practices on primary and secondary market disclosure.
He also suggested developing “model” short forms for releasing information, including unaudited monthly or quarterly financial data, which small governments present to their governing bodies, such as a treasurer’s report.
“It’s out there and the public is entitled to see it,” Hoadley said.
But several committee members balked at filing quarterly reports, especially officials from small issuers that are infrequent participants in the municipal market.
“That really is onerous,” said Julio Morales, the finance director of El Monte, Calif.
Dean Pope, a partner at Hunton & Williams LLP in Richmond and a longtime adviser to the debt committee, said the goal is to find ways for issuers of any size to make any disclosures they chose.
“The safe way to get information out is the common theme here,” he said.
One possible approach, Pope said, would be to develop standardized disclaimers for unaudited financial statements.
In other matters, a committee task force will revise GFOA’s best practices in primary market disclosure, with the goal of completing a draft later this year. Committee members will also work with the NFMA, other GFOA panels, and the National Association of Bond Lawyers, which unveiled pension disclosure guidance earlier this month. NABL hopes to jump-start a pension disclosure discussion among market participants.
But continuing disclosure remains a priority of debt committee chairman Eric Johansen, the treasurer of Portland, Ore. Johansen started his three-year chairmanship in January.
In an interview, he said he sees room for improvement.
“I think we need to make sure our members understand these are serious agreements we enter into and you need to follow them,” Johansen said.
One possibility, he noted, would be to help small issuers develop procedures keyed to continuing disclosure. For example, bond counsel or financial advisers could provide reminders about filing annual audited financial statements and material-event notices.
Such an approach would address one factor cited for noncompliance among small issuers: frequent employee turnover.
“I think it is important that the organization do everything we can to make sure that all governments are living up to their continuing disclosure agreements,” Johansen said.