WASHINGTON – The American Bankers Association is urging the Securities and Exchange Commission to allow for the redaction of confidential information disclosed for bank loans and other alternative financings, while The Vanguard Group is pushing for more disclosure in the commission's proposal.

Digital Assurance Certification LLC (DAC), a disclosure dissemination agent for issuers, also weighed in on the SEC’s two proposed amendments to its Rule 15c2-12 on municipal disclosure, saying that while it supports the intent of the proposal, it must be “more sharply targeted.”

The SEC’s proposal has generated 59 comment letters from market participants, drawing general support from investors and groups representing them, but criticisms from issuers, dealers, lawyers and municipal advisors.

The first new material event notice from the SEC would require an issuer or borrower to file a notice within ten days if it incurs a financial obligation that is material or agrees to covenants, events of default, remedies, priority rights or similar terms “any of which affect securities holders, if material.” The proposal defines financial obligations as "a debt obligation, lease, guarantee, derivative instrument or a monetary obligation resulting from a judicial, administrative or arbitration proceeding."

The second part of the proposal would require a notice to be filed for certain actions or events related to the financial obligation that "reflect financial difficulties" such as a default, event of acceleration, termination event, or modification of terms.

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Securities and Exchange Commission
The American Bankers Association and the two companies with ties to the muni market made their comments in letters sent to the SEC. Bloomberg News

The ABA said it supports the concept of disclosure related to direct loans and direct purchases, but believes the current proposal is “deeply flawed.” The group's letter urges the SEC to withdraw the proposal and reconsider its approach in a more targeted and practical way that will not place “disproportionate burdens on impacted market participants.”

As written, the current proposal would cause issuers and obligated persons to “simply inundate EMMA with an enormous number of voluminous documents, whether or not material, thereby defeating the intent of the new disclosures for all practical purposes,” the ABA said. The term “financial obligation” should be limited to only direct loans and direct purchases, the group added.

There also should be “a mechanism for redacting confidential and personally identifiable information” similar to that for auction rate securities and variable rate demand obligations under the Municipal Securities Rulemaking Board’s Rule G-34 on market information requirements, the ABA said. This would include the pricing for direct loan and direct purchase transactions, which is customized and specifically targeted to the particular financial needs of the obligated person and its financial condition, the group said. The requirement to disclose pricing within ten days qualifies as disclosure on a near-real-time basis, according to the ABA, and could have an anti-competitive effect by increasing the pricing information that is available.

“Because many of these lending transactions are competitively bid, the availability of this ‘real time’ pricing information may inform the bids of competitors and weaken robust pricing competition expected under a sealed proposal process,” the ABA told the SEC.

Vanguard, in contrast, said it “applauds the SEC’s efforts to improve the transparency, accuracy, and timeliness of municipal securities disclosure.”

“Unfortunately … the current municipal disclosure regime has failed to ensure that investors have access to this critical information,” Vanguard wrote.

The mutual fund company gave examples of where the lack of disclosure or a bank loan or placement has potentially hurt investors, It said investors in a school district’s bonds were not informed when the district applied for and drew upon a $10 million line of credit with a bank. The new borrowing significantly increased the district’s level of outstanding debt, but was not disclosed on EMMA, according to Vanguard. Another example involved an issuer that planned to sell bonds but, because of a tepid reception, decided to forego the bond market for a direct placement. Bondholders never got a notification of the new debt, Vanguard said.

“Incomplete, infrequent and delayed disclosures created inefficiencies and uncertainty in the market,” Vanguard wrote. “If bondholders have incomplete and unreliable information, then they are unable to make fully informed investment decisions.”

Vanguard recommended that the SEC further address the problems by focusing on “parity disclosure,” ensuring investors get the same information no matter what debt they hold, as opposed to disclosures premised on the more opaque concept of materiality. It also said the proposal should be written to require disclosure of any terms in connection with a material financial obligation that will affect securities holders instead of requiring that the effects on securities holders be material.

“We believe any term that affects security holders is inherently material to security holders, rendering a second materiality analysis unnecessary,” Vanguard wrote.

DAC, which serves as a disclosure dissemination agent for thousands of issuer and obligated person filings, said that the proposal’s broad nature would “result in a flow of highly unstructured information into the marketplace” that would cause extreme difficulties for investors.

In addition to limiting the proposal to bank loans and direct sales, DAC said it should mimic bond offerings by exempting financial obligations under $1 million as well as those financial obligations with a term of nine months or less.

DAC added that the proposal should also allow issuers to use generally accepted accounting principles in identifying financial obligations and exclude judicial, administrative, and arbitration monetary obligations because such obligations “are of a fundamentally different character” than the other categories.

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