WASHINGTON - The National Federation of Municipal Analysts plans to highlight the need to improve disclosure rules in a paper that will dovetail with and expand on the muni market initiatives announced by the Securities and Exchange Commission last year, the NFMA's new chairman, Rob Yolland, said in a recent interview.
The NFMA plans to address the quality of disclosure, its timeliness, as well as the problems with the enforceability of existing disclosure rules, said Yolland, senior vice president at Franklin Templeton Investments in San Mateo, Calif. The paper will generally support the initiatives unveiled by SEC chairman Christopher Cox and will refute arguments made by other muni market groups that say they are not needed.
"Other industry groups have commented that they think the status quo is fine," Yolland said. "Many of us at the NFMA don't believe that's accurate."
The paper, which will be co-written by a team of NFMA members, including Yolland and the group's immediate past chairman Tom Weyl, comes amid plans by the Municipal Securities Rulemaking Board to develop and host a free central repository for primary and secondary market disclosure documents. The system, which will be called EMMA and will replace the four existing nationally recognized repositories, could be fully operational by the end of the year, depending on the timing of SEC approval.
"The EMMA system solves some of the market problems, but it doesn't solve some of the other issues the NFMA has been battling for years," Yolland said, referring to, among other concerns, the need for changes to disclosure rules that will allow the commission to enforce issuers directly, instead of through broker-dealers. "I understand some market participants cite the low default rate as a reason not to need additional enforcement actions, but if you look at some of the bigger defaults or credit problems in the last 20 years, the bondholders have clearly gotten hurt."
The paper will address changes NFMA would like to see made to the SEC's Rule 15c2-12 on disclosure, which currently restricts broker-dealers from underwriting municipal securities unless the issuer has agreed to send annual financial and operating information to each of the nationally recognized repositories and notices of material events to either the repositories or the MSRB. An issuer also must file a notice if it fails to provide annual financial information by a certain deadline after committing to do so in a continuing disclosure agreement.
"Annual disclosure, as required by 15c2-12, doesn't work for many in our market," Yolland said. "This market is not a one-size-fits-all market, but in most cases, bondholders and bond pricing services need access to information more frequently, not 150 days after the completion of the fiscal year."
The NFMA's suggestions for 15c2-12 could be adopted by the SEC staff if they revisit the rule later in the year, as they have indicated they would, after first modifying the rule to allow for the creation of EMMA. But direct regulation of the issuers by the commission seems unlikely, if not impossible, given that Congress would need to repeal the Tower Amendment, which was added to the Securities Exchange Act of 1934 more than 30 years ago and prohibits the SEC and the MSRB from directly or indirectly requiring issuers to file documents with them prior to the issuance of municipal securities.
No member of Congress has indicated a willingness to support such a move, and Barney Frank, D-Mass., chairman of the House Financial Services Committee, has indicated he would oppose any such legislation.
In a year in which disclosure will be a "huge" focus, Yolland said the group also will work on finalizing its white paper on federal securities laws that is designed to provide analysts with a legal basis for demanding more bond-related information from issuers and other transaction participants.
A draft of the 40-page "White Paper on Federal Securities Law Relating to Municipal Securities" was released in September. Edited by Erik P. Kimball, an attorney at Akerman Senterfitt, and written by a team three other NFMA members, the paper includes a frequently asked questions section that Yolland said will be especially helpful to analysts, particularly when issuers or conduit borrowers refuse to release certain information that is material or arguably material.
For instance, if an issuer or conduit borrower refuses to provide specific information to an analyst, the FAQ outlines three lines of arguments the analyst could pursue to show that the information should be released: that the information is in fact material and should be disclosed; that the information is at least arguably material and questions of materiality should be resolved in favor of disclosure; or that while the information is not material, it nevertheless may and should be disclosed to the analyst.
The group collected public comments on the paper through November and hopes to issue a finalized version soon, Yolland said.
Later this year, the group also will finalize a draft "White Paper on Disclosure for Financial Guarantors" that it released in December. The NFMA is collecting public comments on the paper through March. Especially timely, considering that a number of insurance companies have either experienced or been threatened with rating downgrades due to their exposure to the subprime mortgage market, the paper calls for specific improvements in insurers' financial disclosures.
Separately, the NFMA plans to update or revise four disclosure papers tied to individual sectors - hospitals, land-secured deals, housing, and interest-rate swaps - three of which have not been updated since they were written in 2000. The group has formed committees to write draft revisions of each paper later this year.
"We're just making sure they're up-to-date and still accurate," Yolland said.
Yolland, who succeeded Weyl as chairman of the NFMA at the beginning of the year, has served on the group's board since 2002. At Franklin Templeton, where he has worked for 17 years, Yolland is an analyst of health care credits.. He holds an undergraduate degree in agricultural economics from the University of California at Davis, and a master's of business administration from Santa Clara University. q