WASHINGTON - Securities and Exchange Commission officials this week sent bond lawyers a clarification meant to curb confusion in the market that stated issuers may have to file material event notices if their bonds are downgraded as a result of rating changes to bond insurers.
The clarification, which was informally sent to the National Association of Bond Lawyers late Wednesday, followed a statement SEC officials sent the group Jan. 18 that said issuers did not need to file material event notices notifying investors of Fitch Ratingse_SSRq downgrade of Ambac Assurance Corp. to double-A from triple-A.
The SEC clarification suggested the previous statement may have been misunderstood by some market participants.
"That statement should not be relied upon in a situation involving a change in rating in respect of a municipal security insured or guaranteed by Ambac or any other monoline insurers [whether as a result of a change in rating of the insurer or otherwise]," Wednesday's release said. "The SEC staff would like to clarify that, in such an event, it expects the issuer to review the terms of its specific continuing disclosure agreement to determine what action is required, and in particular whether a material event notice must be filed."
The clarification contrasted with the Jan. 18 statement, which said: "Staff of the Commission has informally stated that press coverage of the recent downgrade of Ambac by Fitch has been so widespread and extensive that, in the opinion of the Division of Trading and Markets, no material event notices of this event need be filed at this time."
Martha Mahan Haines, the SEC's chief of municipal securities, said yesterday that some bond lawyers who had contacted her office were confused because continuing disclosure agreements require the filing of material event notices and it was unclear if the SEC's original guidance meant that they would not be required to disclose the actual downgrades of the bonds wrapped by credit enhancement from downgraded insurers. There is typically a lag between the time the ratings agencies downgrade insurers and when they list the individual bonds affected by that rating.
"Now that the actual ratings downgrades of the individual bonds are out, you've got to disclose those as a material event under continuing disclosure agreements," Haines said. "We can't interpret around that."
The SEC's updated disclosure guidance came the same evening that Rep. Paul Kanjorski, D-Pa., released a Jan. 31 letter from SEC chairman Christopher Cox, along with a five-page memo that mentioned an SEC notice on disclosure would soon be released.
The memo, written by Erik Sirri, the commission's director of trading and markets, said that disclosure in the muni market "is substantially less comprehensive and less readily available than disclosure by public reporting companies." It also said that "recent problems of municipal bond insurers and the direct and indirect impact on municipal bond investors illustrate once again some of the shortcomings of the regulatory structure of this market."
"Despite the size and importance of this market, it lacks a variety of the systemic protections found in many other sectors of the U.S. capital markets," Sirri said.
"The National Association of Bond Lawyers recently asked commission staff for guidance on the potential impact of failures to file material event notices about downgrade issues pursuant to [SEC's Rule 15c2-12 on disclosure]," the memo continued. "Commission staff expects to issue such guidance shortly."
Kanjorski announced last month that he has launched an inquiry into the bond insurance industry and asked federal and state regulators for information, including whether statutory or regulatory reforms are needed. His staff released responses from the federal and state regulators late Wednesday, including the letter and memo from Cox and Sirri. Kanjorski plans to hold a hearing to discuss the issues on Feb. 14. q
