Louisiana Bill Would Require Continuing Disclosure Compliance

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BRADENTON, Fla. - When Louisiana state Sen. Eric LaFleur isn't working as a lawmaker, he is a bond attorney who doesn't like what he finds when performing due diligence for some issuers.

"There is a lack of compliance," said LaFleur, a partner Mahtook & LaFleur in Lafayette, La.

The law firm, which serves as bond counsel to local governments and small political subdivisions, has found several clients that have not complied with continuing disclosure agreements.

LaFleur said that doesn't happen on purpose, but that small issuers in particular don't have the staff or sophisticated bond programs to follow disclosure requirements.

To combat the problem, LaFleur sponsored Senate Bill 384 , requiring that municipal securities issuers in Louisiana comply with the Securities and Exchange Commission's Rule 15c2-12, as well as maintain a list of securities, continuing disclosure agreements, and current ratings.

The bill also requires that auditors make sure issuers are fulfilling recordkeeping duties, and review a sample of filings on the Municipal Securities Rulemaking Board's EMMA system to determine if they comply with disclosure agreements.

"By having auditors check this, I think there will be better compliance and there will less likely be action by the SEC," said LaFleur, D-Ville Platte.

The legislation, he said, was not prompted by the SEC's recent initiative encouraging issuers and underwriters to self-report inaccurate statements in bond offerings about compliance with continuing disclosure obligations.

"The buyers of the bonds deserve better disclosure," he said.

The GOP-led Legislature agreed, and both chambers passed the bill unanimously. The measure landed on the desk of Gov. Bobby Jindal, a Republican, on May 28.

LaFleur expects it will be signed into law.

Though it's unclear if similar laws exist in other states, some muni and auditing experts support it.

"I think it's a great idea," said Mitchell Savader, founder and chief credit officer at Savader Asset Advisors. "There are a number of issuers who don't live up to their continuing disclosure agreements, and that creates problems for us."

Savader, whose Great Neck, N.Y.-based firm deals with many small issuers on behalf of investors needing credit analysis, said part of the problem now is that continuing disclosure agreements don't include a "hammer" to insure compliance, and the market is not efficient enough to penalize an issuer by requiring higher interest rates.

The SEC can file enforcement actions against municipal issuers for making misrepresentations in bond offerings about prior compliance with disclosure obligations.

In June 2013, the SEC took such action for the first time ever.

West Clark Community Schools in Clark County, Ind., its underwriter, Indianapolis-based City Securities Corp., and the firm's senior executive vice president Randy G. Ruhl, were charged with falsely telling bond investors that the school district provided annual financial information and notices required as part of its prior bond offerings.

The SEC found that West Clark did not submit any annual reports or notices after issuing bonds in 2005, but said it had complied with disclosure obligations in a 2007 official statement.

The school district did not admit or deny the findings, though it consented to a cease and desist order agreeing not to violate securities laws. The district also adopted written policies for handling continuing disclosure obligations, designated an individual responsible for compliance, and instituted training procedures.

"I've spoken to some issuers who say, 'Why should I care about this?'" said Savader, a 28-year veteran of the municipal bond industry.

"They won't give us information for our clients," he said. "It's been that clear cut, and it makes me pretty mad, actually."

Some issuers continue to file documents with nationally recognized municipal securities information repositories, such as Bloomberg, but they do not file with EMMA, he said.

"What we also have is a problem with these very small special-purpose districts that were created specifically to provide infrastructure for new development," he said. "They are small and lack understanding of public finance."

More than 1,000 of those credits are in the firm's review pipeline, and about 50 small districts have not submitted required documents or they cannot be contacted.

In cases like that, Savader said clients are told that issuers are not providing the necessary information, and they might want to consider other investments from issuers that are providing the proper information.

As for Louisiana's bill requiring auditors to check disclosures, Savader said that seeing a notice of audit deficiency will "hopefully put pressure on issuers to erase that deficiency" and provide required documents.

"We're not the end user but the organization that will actually take the information, crunch the numbers, and do the analysis," he said, adding that anything that provides access to the necessary data is extremely important.

Auditors should not find Louisiana's new requirements objectionable, assuming they are signed into law by the governor, said to Stephen Blann, a certified public accountant at the 30th-largest regional CPA firm in the country and an advisor to the Government Finance Officers Association's Committee on Accounting, Auditing, and Financial Reporting.

The law indicates that auditors will be asked to simply verify that disclosures were filed, not to render an opinion, and that should keep the burden low, said Blann, director of government audit quality for Rehmann, based in Grand Rapids, Mich.

Some of the bill's language is vague, and some terminology is not in keeping with auditing standards, he said, adding, "There's no statement on what to do if there's noncompliance."

When asked if it's a good idea to add disclosure checks to the auditor's list of duties, Blann said it would depend on how easy it is to audit SEC compliance statements. He also said a lot depend on implementing regulations.

Those regulations, or rules, will be developed by the state auditor, according to LaFleur.

The intent of the bill, he said, is to direct the state auditor to add compliance with SEC reporting requirements to the duties of auditors - those who work for the state, and private firms that audit governments. He also expects deficiencies to be noted in audits.

"When they go in and do an audit, they are looking at issuance and the right coverages so they are already looking at public debt," said LaFleur. "It should not be a huge burden."

There was no organized opposition from auditing firms to the bill, though the cost adding the task was questioned, he said. The cost was determined to be de minimis.

"This, hopefully, will serve as a check to make sure everyone is in compliance," said LaFleur. "This serves as a check to avoid any potential SEC action."

Louisiana's legislation is interesting and positive, said Carol Jessup, a CPA, associate professor of accountancy at the University of Illinois Springfield, and advisor to the GFOA accounting, auditing, and financial reporting committee.

Jessup said that in Illinois, which has the most special purpose governments of any other state, such a requirement would be welcomed by citizens and investors.

"Anything that can bring to light contractual agreements in place, compliance with covenants, and the bond ratings serves to help promote awareness," she said, noting that in the wake of Detroit's bankruptcy more citizens want to be informed of debt-related issues because of the potential impact.

"To me, this act is about increased internal controls within government related to government's sometimes unchecked ability to incur debt," said Jessup. "Internal controls are key in every organization, and particularly where taxpayer funding is at stake."

She called the SEC's disclosure requirements a form of "best practice," and said that auditors should be looking at disclosures in the financial statement audits of the local governments as well as recordkeeping and compliance with continuing disclosure agreements.

Audits contain footnotes and disclosure issues such as bond covenant violations, so Louisiana's bill should not increase the burden of experienced governmental auditors, said Jessup.

"I cannot find argument with it, and wish the state of Louisiana luck in both implementation and continued monitoring of this initiative," she said.

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