CORONADO, CALIF. -- The acting chief of the Securities and Exchange Commission's Office of Municipal Securities echoed the Municipal Securities Rulemaking Board's concern about selective disclosure, after an MSRB market advisory on the issue created some controversy.

Rebecca Olsen, the acting director of the SEC muni office who is considered the top candidate to become permanent director, spoke about the issue on Wednesday during a roundtable discussion at the National Federation of Municipal Analysts' annual conference.

Olsen spoke up after NFMA chair Mary Francoeur raised the subject as the panel's moderator and after MSRB President and CEO Lynnette Kelly defended the MSRB's decision to comment on the September market advisory.

Some market participants felt the MSRB went beyond the scope of its responsibilities in commenting on selective disclosure, which occurs when only a select group of investors receive certain information. Analysts had been particularly perturbed, with some saying that issuers would no longer answer their calls because the MSRB's advisory warned there could be a risk of insider trading charges if an investor made a trade based on selectively-disclosed information.

Kelly said many people “secretly whispered” that the MSRB’s selective disclosure commentary was a positive thing. She said there have been past instances of private investor meetings where only certain investors were granted access to information.

“We think it’s an issue," Kelly said. "We think it’s a big issue.”

The MSRB sees no reason not to keep promoting best practices, Kelly said.

The SEC's Rebecca Olsen
The SEC's Rebecca Olsen

Olsen expressed her position at that point.

"I would also echo Lynnette’s concern here," said Olsen, explaining that she felt bonds might not be priced correctly in the marketplace if only some investors had access to material information. The Supreme Court has defined materiality to mean information that a reasonable investor would consider important when making an investment decision.

“It’s certainly not in the best interest of investors for there to be selective disclosure," Olsen said. She added that concern about information communicated widely to investors was the impetus behind the SEC's proposal to modify its Rule 15c2-12, which specifies the events on which issuers must file notices with the MSRB's EMMA system in order for underwriters to be able to underwrite the bonds.

The proposed amendments would require an issuer or borrower to file an event notice if they incur a financial obligation that is material or a financial obligation has an agreement to covenants, events of default, remedies, priority rights or similar terms "any of which affect securities holders, if material."

The proposal also would require an event notice to be filed for certain actions or events related to the financial obligation that "reflect financial difficulties" such as a default, event of acceleration, termination event, or modification of terms.

Olsen said the SEC received very diverse comments and that the commission staff is in the midst of preparing its recommendations on the matter to pass on to the commissioners.

Jonas Biery, chair of the Government Finance Officers Association's committee on governmental debt management and business services manager for the City or Portland, Ore. Bureau of Environmental Services, said that issuers struggle at times with the concept of materiality when deciding what to disclose. Issuers aren't looking for a hard definition of materiality, but want some help knowing that the judgment they are applying is appropriate, he said.

Dee Wisor, an attorney at Butler Snow and the president-elect of the National Association of Bond Lawyers, said NABL disagreed with the tone of the MSRB's selective disclosure advisory and felt it may have overstated concerns.

Olsen said materiality is very "facts and circumstances-based," but added that any effort for the SEC to define materiality more specifically would have much wider implications.

The NFMA conference continues this week and concludes Friday.

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