We write to clarify and reinforce the long-standing position of governmental municipal issuers in support of complete and full disclosure in the municipal bond market.
First and foremost, we believe that insufficient attention is given to the extensive and high-quality disclosure provided to the marketplace by state and local governments. It is a myth that municipal market disclosure is "unregulated" and "voluntary."
Municipal disclosure is subject to the anti-fraud provisions of both the Securities Act of 1933 and the Securities Exchange Act of 1934. Municipal issuers are also required by Securities and Exchange Commission Rule 15c2-12 to produce and file each year financial information and operating data relevant to the bonds they have issued.
Additionally, there is a strong consensus among issuers, analysts, and investors as to the required content of primary market disclosure (50- to 100-page, carefully drafted official statements are the norm in the municipal market), which is tailored to meet the needs of different sectors within the municipal market.
The primary market disclosure conventions are strongly supported by the municipal bond attorney community in their roles as bond counsel, underwriter's counsel, and disclosure counsel. Indeed, the National Association of Bond Lawyers has drafted a 268-page treatise on disclosure regulation in the municipal marketplace. As a result of all of these efforts, muni market disclosure in the primary market is excellent.
For nearly 30 years, the Government Finance Officers Association has formally been on record encouraging every state and local government to follow generally accepted accounting principles.
The GFOA also has provided leadership in improving disclosure practices through the development of its disclosure guidelines, as well as best practices on "Using a Web Site for Disclosure," "Maintaining an Investor Relations Program," and "Using a CAFR to Meet SEC Requirements for Periodic Disclosure."
Furthermore, for more than 60 years, the GFOA's Certificate of Achievement for Excellence in Financial Reporting Program has encouraged governments to issue a comprehensive annual financial report that provides a wealth of information beyond what is required by GAAP (e.g., extensive statistical-trend data and detailed reporting on individual funds).
Today, participants in the program include almost 99% of cities with populations over of 200,000, 77% of cities with populations over 50,000, 88% of counties with populations over 250,000, and 50% of counties with populations over 50,000.
Consequently, a large portion of general government issuers (those responsible for issuing the most tax-exempt debt) currently issue financial reports that provide information well beyond what is mandated by GAAP.
Unlike the private sector, all budgeting, operating, and financial decisions occur in the public domain. As Ben Watkins noted at a House Financial Services Committee hearing on May 21, past, current, and future financial information from state and local governments are routinely available to the public due to "sunshine" requirements. City council hearings, county commissioner meetings, and legislative hearings where a government's budget decisions are made and financial standing reported occur in the public domain and are reported on extensively by the general media.
Such openness cannot be found in the private sector. Therefore, calls from various government officials and market participants claiming a lack of information in the public sector and the need for governments to emulate corporate disclosure standards, should instead realize that just the opposite should be done - the private sector should duplicate the openness and transparency of governmental issuers.
There are disagreements as to the extent of full compliance with requirements for municipal market continuing disclosure. GFOA has been a strong force, along with many other market participants, in the creation of the (former) central post office and now Electronic Municipal Market Access, or EMMA.
Submitting disclosure information to a central location in electronic format is beneficial to issuers and investors alike. One of EMMA's most significant benefits is that for the first time, continuing disclosure information submitted by issuers will be available to investors free of charge.
When Rule 15c2-12 was revised in 1994, with the creation of the nationally recognized municipal securities information repositories, it did not allow such information to be available to investors without having to pay for the information. Additionally, there was no system for identifying and retrieving information filed by issuers or performance standards for the NRMSIRs.
Thankfully, the SEC has rectified these problems by approving EMMA and allowing free access to all information. The emergence of EMMA also enhances the cooperative and mutually supportive efforts of the municipal market participants - issuers, analysts, investors, bond lawyers, dealers, and financial advisers.
While we disagree with the notion that new mandatory disclosure standards should be placed on governmental bond issuers, the GFOA's governmental debt management committee recently discussed the issue of enhancing disclosure in certain areas that have received attention since the fiscal crisis.
These include more thorough disclosure of derivatives and derivative counterparties, guaranteed investment contract agreements and GIC counterparties, commercial banks providing letters of credit or liquidity agreements backing variable-rate demand bonds, and trigger events and other terms and conditions of all of the above.
Recently the National Federation of Municipal Analysts highlighted these issues in a letter to the SEC, and we acknowledge their past and current contributions to help refine good disclosure practices.
We may not agree with the particular manner in which such practices should be integrated into a government's disclosure procedures, but we concur that these issues should be part of discussions to improve municipal disclosure practices.
Issuers increasingly interact with investors and have been responsive to constructive requests for information. We have recently noticed a trend in which investors, prior to purchasing a security in certain sectors, request commitments for certain kinds of ongoing disclosure.
This is an important development, as investors exercise their ultimate power of deciding whether or not to purchase a security, after discussing with individual issuers the particular disclosure needed. We encourage and support ongoing dialogue between issuers and investors to meet the needs of both.
This is an important time in the municipal securities sector, and as we make the critical turn to recovery from the crisis that has gripped our market over the past year, all market participants should look to enhance best practices to contribute to the well-being of the sector.
Some of the sector's strongest achievements (e.g., creation of the central post office) occur when there is a venue for dialogue and developing consensus on various issues. We would support, as the NFMA has suggested, recreating an informal task force to facilitate discussion on a variety of issues of interest to all market participants.
With the creation of EMMA, it will be possible to determine conclusively over time any remaining problem areas and sectors of municipal issuance where filings are not being regularly made.
It is essential that efforts of the municipal bond community and calls for changes to the market's regulatory framework be directed to those substantive areas and those issuer sectors where improvement needs to be made, rather than to have a knee-jerk reaction of adding more across-the-board regulation that is likely to be neither targeted nor effective at improving the quality of information available to the municipal market.
Alan Anders, New York City; Roger Anderson, Princeton, N.J.; Natalie Brill, Los Angeles; Julia Cooper, San Jose; Frank Hoadley, Madison, Wis.; Eric Johansen, Portland, Ore.; Patrick McCoy, New York City; J. Ben Watkins, Tallahassee, Fla.
(These comments do not necessarily represent the views of the GFOA or the writers' employers.)
