BALTIMORE — Municipalities struggling with fiscal distress need to be especially mindful of fulfilling their continuing disclosure obligations, regulators and analysts said Friday.
Representatives of the Securities and Exchange Commission and the Municipal Securities Rulemaking Board joined analysts for a discussion on secondary market disclosure at The Bond Buyer's Municipal Distress, Recovery, & Financial Sustainability Symposium here.
Yaffa Rattner, a managing director at Piper Jaffray & Co., told conference attendees that their disclosure compliance could be even more important in the current low interest rate environment, when investors are more tempted to seek out higher-yield securities offered by distressed issuers with lower credit ratings. Issuers should help facilitate market transparency by providing more frequent filings to EMMA, allowing investors and analysts to form more "forward looking" pictures of the strength of the debt they hold, than would be possible with annual audited financial statements, she said.
"Disclose that information quarterly or semi-annually so we can add to the transparency," Rattner urged the many issuer officials present.
Municipal issuers generally are not regulated under the federal securities laws outside of the anti-fraud provisions. But SEC muni office chief counsel Rebecca Olsen reminded them that they are required to comply with their continuing disclosure obligations and that, if they do not, they could be hit with an SEC enforcement action when accessing the market later on. She pointed to last year's action against Harrisburg, Pa., which failed to make its required disclosures for an extended time and forced investors to seek out information through the city's website and other sources, some of which was misleading and led to a fraud charge against the city.
A bond lawyer attending the conference told Olsen that many lower-rated issuers suffer from mismanagement, and wanted to know how federal regulators could address the problem. Olsen said that her office receives many tips about potentially problematic issuer behavior that are investigated, but that the SEC does not have the authority to intervene unless it suspects that there has been a violation of the securities laws. She added that some disclosure in official statements is poorly done, and that she receives phone calls from investors asking for her help in finding where information is located in an OS.
"Sure enough, it's there. They just couldn't figure it out because the material was so dense," she said.
Rattner warned against throwing the entire "kitchen sink" into the disclosure mix because not all information is material to muni bondholders, but panelists agreed that issuers should lean toward disclosing most potentially relevant information publicly via EMMA and other means.
Jeffrey Previdi, a managing director at Standard & Poor's, urged issuer officials to think of their dealings with rating agencies as a "relationship" built on open communication. When discussing a private placement or a bank loan, Previdi said, the rating agency should have information so that the analysts can be fully aware of the rationale behind the decision as well as the financial specifics of the deal.
The panelists also agreed that increasingly popular bank loans should be disclosed, but Olsen pointed out that it is important for the issuer to make clear to the lending bank that the terms of the deal should be disclosed. Many banks would not want competitors to be able to gain insight into their business strategies that way, Olsen said.
Ernesto Lanza, MSRB deputy executive director, told participants that it is not yet clear what role municipal advisors will play in managing issuer disclosure. The MSRB is in the process of developing rules for MA conduct, but MAs already have a statutory fiduciary duty to under the Dodd-Frank Act to put muni issuer clients' interest first. Lanza said MAs might have to give issuers hard advice that could result in short-term harm, but that is necessary for to avoid the long-term pain of a law violation. He said MAs shouldn't interpret their duty to be loyal to their clients as barring them from giving the tough advice. "Having that loyalty does not mean you do things that are wrong," Lanza said.
