FORT LAUDERDALE, Fla. In response to stepped up Securities and Exchange Commission enforcement actions against individual public finance officials for alleged disclosure failures, the Government Finance Officers Association's committee on debt management moved Saturday to form a task force to create new guidance.
The task force is charged with drafting a recommended practice that includes an introduction to disclosure obligations with a "plain-language" explanation of the SEC's Rule 15c2-12 on disclosure as well as outlining suggestions for crafting official statements and continuing disclosures, and detailing the differences in responsibilities between issuer staff and elected officials, according to an outline distributed at the committee's meeting on Saturday.
The committee is still recruiting members to join the task force but hopes to have a draft of the disclosure RP completed by the group's winter meeting in January.
The task force comes after the SEC in April filed securities fraud charges against five former San Diego officials claiming, among other things, that they made false and misleading statements in connection with $260 million of muni securities the city issued in 2002 and 2003.
A member of the debt committee said the SEC's San Diego suit is "appalling and very frightening" because it revolves around the projections of pension obligations that are "not that different from the things we deal with on a day-to-day basis." The perception among many of the members of the committee, he said, is that the SEC is starting to blur the line between projections and facts in terms of what issuers need to disclose.
He also stressed that it is unusual for the SEC to file charges against individual governmental officials, noting that historically the SEC has resorted to cease-and-desist orders against governmental issuers.
The push to establish a disclosure RP comes as the committee is seeking guidance from the SEC on disclosure requirements for issuers who have sold bonds that are wrapped by bond insurers whose ratings have been downgraded by credit ratings agencies.
In a February letter to the SEC that the GFOA disclosed Saturday, Frank Hoadley, the debt committee's chairman, asked for clarification on whether issuers must provide material event notices relating to bond insurer rating downgrades, even if insurance from the insurer was added to their bonds without their knowledge. Hoadley said that he has not received a response to the letter.
Some committee members believe it is unreasonable to expect state and local governments to file material event notices when the ratings on the insurance wrapping their bonds but not their bonds' underlying ratings change.
Hoadley, Wisconsin's capital finance director, said that the SEC's Rule 15c2-12 places an impossible burden on issuers in such circumstances because they have not been formally told by either the rating agencies or the bond insurers that the insurers' ratings have been lowered.
"It's hard to disclose what you don't know as a matter of fact," he said.
A second letter that Hoadley sent to all three major credit rating agencies in February resulted in conference calls with the rating agencies but no agreement for them to formally communicate bond insurance downgrades to issuers, Hoadley said.
At Saturday's debt committee meeting, members from different jurisdictions described their various approaches to the issue of disclosing that insurers of their bonds have been downgraded.
One finance director said he has filed notices generally that insurers of his bonds have been downgraded, while another said she has filed notices on each insured bond when the insurer has been downgraded. Another member said he would not file any disclosures and has instructed his bond counsel to draft a legal document explaining why.
Under 15c2-12, a dealer may not underwrite munis unless the issuer of the bonds has contractually agreed to disclose to nationally-recognized repositories financial and operating information at least annually, as well as the occurrence of any of 11 specified material events, such as rating changes, bond calls, and adverse tax opinions, or events affecting the tax-exempt status of the bonds.
Though Hoadley has received no response from the SEC, his letter came after the commission distributed two pieces of guidance to bond attorneys earlier this year meant to clarify issuers' roles amid the rating downgrades of insurers.
The first, which the commission informally sent to the National Association of Bond Lawyers on Jan. 18, stated that issuers did not need to file material event notices notifying investors of the initial Fitch Ratings' downgrade of Ambac Assurance Corp. to double-A from triple-A because "press coverage had been so widespread and extensive."
But in a Feb. 6 clarification, which some attorneys saw as a reversal, the SEC stated that the Jan. 18 notice only applied to the reporting of the rating downgrades to the insurers and not to the wrapped securities that were downgraded as a result.