WASHINGTON – Issuers said at a meeting here on Monday that they often must confront bank demands for redactions of terms and questions of materiality when trying to disclose information about private placements.
Members of the Government Finance Officers Association's Committee on Governmental Debt Management shared their experiences with such disclosures and discussed whether they should develop guidance at the GFOA's 2017 Winter Meeting.
Jonas Biery, chair of the committee kicked off the discussion by saying there seems to be a misguided view that issuers are trying to hide information via private placements.
When, in fact, “for the past few years we’ve been working really hard” to facilitate good disclosure on private placements, said Biery, business operations manager for the Portland Bureau of Environmental Services in Oregon.
Biery noted that issuers have, among other things, encouraged the Municipal Securities Rulemaking Board to enhance EMMA to make it easier for them to post disclosures about private placements and bank loans. Also many groups, such as the Governmental Accounting Standards Board, have issued guidance that issuers are following.
Biery asked committee members about their experiences.
Eric Johansen, debt manager for Portland, Ore., said that three years ago, before the modifications to EMMA were made, his city began disclosing information on a range of financial obligations besides bonds, including private placements.
“An area of frustration we’re continuing to have with banks,” he said, is that they want to redact a lot of the information investors would want, such as on pricing. He said he understands not disclosing such things as wiring instructions, but not basic terms of the transaction, he said.
Other issuers reported the same problem with banks.
One county official on the committee said, “We’ve made it very clear that we’re transparent.” When a bank wanted to redact the signatures of its bankers on a transaction document, county officials told them that their signatures were all over the Internet in public documents.
Another issuer said when she and her team meet with bank officials they tell them: “We are controlling the documents. We are writing the documents. Just because we select you, we’re not agreeing to your term sheet.”
Committee members worried that smaller issuers may not question bank officials when they say they’re just including standard and redacted language in private placement documents and disclosures.
Biery said after the discussion that he has actually been part of deals that were unwound because a bank tried to put language in a document that he and his team didn’t agree with.
Several committee members said during the meeting that they struggle with the question of what information would be material to investors and therefore should be disclosed.
“How do you deal with the materiality of a lease purchase?” one asked.
“There’s no definition, no federal definition, no agreed upon definition” of materiality, Biery said.
“The question of materiality is always hard,” said Geoff Buswick, a managing director and sector lead in U.S. Public Finance at S&P Global Ratings. He recalled one issuer who asked him if should disclose four $30 million non-public transactions he’d done over each of four years. “That’s $120 million out there that no knows about,” said Buswick, adding he strongly urged the issuer to disclose the deals.
Committee members also talked about situations where they are unaware of transactions other city officials have engaged in.
Johansen said that while the city tries to disclose information on all transactions,
“I’m sure I haven’t done seen everything -- like someone in the Park Service buying lawn mowers.”
Margaret “Peg” Henry, deputy general counsel at Stifel Nicolaus who is an advisor to the committee, said, “I’ve been disturbed to hear people say, ‘Do a private placement, there’s no disclosure.” She said later she was referring to bond counsel and advisors.
“To me this is just one big 10b-5 problem coming at you,” Henry said, referring to the Securities and Exchange Commission rule that prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of any security.
“What should we be doing as a committee to further this discussion?” Biery asked committee members.
They talked about writing a recommended practice on private placement disclosure, tweaking existing documents such as an existing recommended practice on bank loans, and continuing to work with other muni groups on this issue.
Committee members agreed to leave it on the work plan for further discussions.