NEW YORK CITY - The secondary market disclosure system "is not broken, it just needs a little repair," Martha Mahan Haines, the chief of the SEC's Office of Municipal Securities, said yesterday after the commission held its third annual Municipal Market Roundtable here.
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But Haines said she has not yet decided if the repairs should be made through changes to the Securities and Exchange Commission's Rule 15c2-12 or through market-based efforts. She said she needs to give more careful consideration to some of the recommendations made at the roundtable for improving secondary market disclosure before deciding.
Although some of the roundtable panelists, such as Paul Maco, the former SEC municipal office director who is now a partner at the law firm of Vinson & Elkins in Washington, suggested the improvements be market-based because of the difficulty in getting market groups to agree on what is needed, others called for rule changes.
Roger Davis, a partner at Orrick, Herrington & Sutcliffe in San Francisco, drew a lot of interest when he suggested while speaking on a panel that the SEC somehow require issuers, in order for their disclosure filings to be valid, to file forms when their bonds are issued that identify the bonds' Cusip numbers, the names of the issuer and "obligors" or borrowers, contact information, the dates disclosure documents are due, and whether the disclosure information can be found on the issuer's or borrower's Web sites.
Peter Schmitt, another panelist and the president of DPC Data Inc., one of the four SEC-designated nationally recognized municipal securities information repositories that collects and disseminates issuer disclosure documents, called for six amendments to Rule 15c2-12. One would require nine-digit Cusip numbers to be attached to all disclosure filings. Another would allow NRMSIRs to charge willing issuers for dissemination services so documents can be provided for free to investors and other market participants.
Schmitt also proposed changing the rule to limit the amount of time in which issuers have to disclose annual financial information. He urged the SEC to eliminate the list of 11 defined material events and replace it with a more generalized rule that requires notices to be sent to NRMSIRs about any event that could reasonably affect the trading value of an issuer's or borrower's outstanding bonds. In addition, he said Rule 15c2-12 should explicitly state that issuers can satisfy their disclosure requirements by filing documents electronically.
Schmitt made three other recommendations. The SEC, he said, should enforce the rule vigorously and institute a formal outreach program to educate issuers and borrowers about their disclosure obligations. The commission also should grant the NRMSIRs a limited exemption from anti-trust rules so they can form a trade association, develop common technical standards, and address system-wide disclosure problems issues, he said.
Schmitt said that many of the problems attributed to the repositories are rooted in the failure of issuers to properly file disclosure information with each of the four NRMSIRs. He took a swipe at this competitors, saying not all NRMSIR archives are available to all investors, only one repository provides archived documents electronically, and two of the NRMSIRs provide only paper documents to investors. He did not name the NRMSIRs.
A broker-dealer official attending the roundtable complained to SEC officials that two of the NRMSIRs are not really providing disclosure services and are more interested in obtaining disclosure documents for data to enhance their information products and services. He did not identify the two repositories.
Doug Kemp, a lawyer with Bloomberg, also a NRMSIR, suggested the development of a centralized alert system that would allow each NRMSIR to list the documents received from issuers and how those documents can be obtained. Kemp said the system would not detail or contain summaries of the documents, just list them. They would be provided for free to retail investors. "Commercial users" would be charged, he said.
While Bloomberg has been criticized for being available only to users of its terminals, Kemp claimed that retail investors can access Bloomberg's Web site to request disclosure documents.
Maryrose Carosia, with the Standard & Poor's/J.J. Kenny NRMSIR, called for the creation of a working group involving all market participants, including the NRMSIRs and regulatory officials, to develop recommendations for improving secondary market disclosure. Carosia said that, contrary to some complaints, the NRSMIR system is not a mess. NRMSIRs provide valuable services to municipal market participants such as researching and updating Cusip numbers linking disclosure documents to bond issues, she said.
Officials from the Municipal Advisory Council of Texas, an SEC-designated state information depository, urged that their disclosure system be used as a model for a national disclosure system.
Terry Atkinson, director of UBS PaineWebber's municipal securities group, called for a "single source" of disclosure information -- a central repository or Web site -- where broker-dealers, investors, the NRMSIRs, and the regulators are all assured of easy access to disclosure documents. Robert Estrada, chairman and chief executive officer of Estrada Hinojosa Co., agreed and said the site should contain a tickler system to remind issuers when documents are due and should be run by the Municipal Securities Rulemaking Board.
But Relmond Van Daniker, executive director of the National Association of State Auditors, Comptrollers, and Treasurers, urged that the states be required to each create SIDs like the Texas MAC that would be in charge of disclosure documents instead of the NRMSIRs. Frank Hoadley, Wisconsin's capital finance director, and others said this would not fly in some states where local issuers do not want state involvement in their offerings.
Jane Dickey, a partner at the Rose Law Firm in Little Rock, said the NRMSIR system should be left in place and improved. But she also suggested the SEC should perhaps require dealers to have procedures in place to monitor issuers' annual financial information, not just material event notices. In addition, she called for issuers to agree, in their continuing disclosure contracts, to provide disclosure documents to bondholders. But Estrada said, "If it's available on the Internet, it's available to all."
Diane McNabb, managing director of investment banking at A. G. Edwards & Sons Inc. in Atlanta, urged the SEC not to make secondary market disclosure requirements so strict that issuers will turn to banks to borrow money instead of the tax-exempt bond market.
McNabb conceded that underwriters often do not press issuers to meet disclosure requirements because they want the business. "I think the industry tends to gloss over the requirements with issuers," she said. She said dealers need guidance on how delinquent an issuer needs to be in its disclosure filings for dealers to refuse to underwrite or recommend its bonds.
Walter Knorr, Chicago's chief financial officer, said he hasn't seen any evidence that good disclosure reduces borrowing costs. He also said good disclosure "doesn't hurt." Knorr said issuers can disclose some data quarterly like cash flow information, but not full financial statements.
Gerry Lian, a vice president and senior analyst at Morgan Stanley Dean Witter Advisers Inc., who attended the roundtable, suggested issuers be charged more for filing disclosure documents in paper to provide an incentive for them to file electronically.
