WASHINGTON — The National Federation of Municipal Analysts has issued a white paper describing best disclosure practices in the primary market, recommending more "plain English" offering documents, clear descriptions of security for bonds, and details about key investment risks.
The 21-page paper took about a year to produce and represents the input of more than 100 NFMA members, who are primarily credit analysts. The guidance came about because of a wide variation in pre-offering practices and standards, according to BNY Mellon Wealth Management's Greg Aikman, who chaired the committee that produced the paper. Of the 113 NFMA members surveyed to collect information for the project, 54% characterized primary market disclosure as inconsistent, with only 42% saying it was "generally adequate."
"The NFMA believes these white paper recommendations will serve as an industry benchmark for improved and more uniform new issuance practices, and welcomes input from industry participants," Aikman said.
Among the top recommendations is that preliminary official statements include a summary in language easily understood by retail investors.
"An introductory summary in plain English on the cover page or in the introductory section of the [preliminary official statement] would be very useful to all investors and credit analysts," the paper states. "Plain English ensures the orderly and clear presentation of complex information that uses words economically, is well-organized and easy to read, avoids the extensive and redundant use of technical and 'defined' terms, and avoids lengthy sentences."
An overwhelming 84% of survey respondents said such a summary is either essential or desirable for high-grade bonds, and 93% said the same for low-grade bonds. That section should include a description of all transaction parties, payment sources, key documents, sources and uses of proceeds, redemption options, and other important information, the paper recommends.
Aikman said that even a veteran muni analyst can struggle with the documents sometimes found in the market right now. "Some of them are just great," he said. "Others are not so great. If I'm having difficulty, I can't imagine what it's like for the average retail investor."
Another important recommendation in the paper is the description of bonds' security include a clear description of where the funds come from, a diagram showing the flow of money, and a summary of the legal provisions and bankruptcy eligibility of the issuer.
"A clear description of how your bonds are secured is very important," said Aikman.
Detroit's municipal bankruptcy came as a shock to market participants who have had to watch a federal judge determine questions of great importance to bondholders. Jefferson County, Ala. also sold general obligation bonds secured by revenues the county was unable to increase if necessary.
NFMA will take comments on the paper through April 14, and may issue a revision.
