SEC regs affect municipal issues
For years, government issuers of tax-free municipal bonds have been exempt from registration and disclosure requirements applicable to corporate issuers. The Securities and Exchange Commission (SEC) has intruded into this comfortable world by imposing ongoing disclosure requirements to protect investors purchasing municipal bonds. Bonds purchased on or after July 3, 1995 will be subject to the amendments.
Since 1989, SEC rules have not specified guidelines for information in issuer statements provided to underwriters for review and distribution to customers. New rulings state that municipal issuers must submit financial information or operating data to the SEC as well as to all “other entities, enterprises, funds, accounts and other persons material to the offering.” Defining “material” is left up to each issuer. In addition, issuers must disclose any failures to comply with previous disclosure rulings and describe current disclosure procedures followed.
The official statement must include the type of financial information and operating data to be provided, the accounting principles used and the annual disclosure date. Inattention to details in the disclosure could result in liability, so issuers should build as much flexibility as possible into the agreement.
Issuers must also provide financial information and operating data annually to national and state information repositories for fiscal years ending on or after January 1, 1996. The annual information should mirror the final official statement, and any misleading data must be clarified or explained. Any material events affecting the bonds, such as default on a bond payment, bond calls, rating changes or events affecting tax exempt status, should also be submitted.
What constitutes “timely” notice will depend on the particular circumstances. For example, a municipality should include the fact that its largest local employer went out of business since the end of the previous year for which it is filing.
Other circumstances may also warrant similar notices. A municipality receiving a request for information that may not be available to the public should consider providing that information to a national repository as well to avoid problems with selective disclosure.
Failure to comply will result in manditory reporting of non-compliance, being subject to enforcement actions or being held liable for resulting market losses suffered by investors.
Issuers with a history of poor disclosure practices are likely to pay higher interest rates or be “squeezed” by prospective purchasers.
SEC rules allow several exemptions, including a partial exemption for “small issuers,” generally those it less than $10 million in total outstanding securities. Small issuers, however, are not completely exempt and still must provide some annual financial information and material event notices.
Clearly, the new requirements signal change for municipal issuers. Besides budgeting for cost and time investment, both of which could be substantial, issuers should consider appointing select staff members to develop and carry out disclosure practices instead of relying solely upon underwriters or other participants.
SEC Chairman Arthur Levitt, Jr. says, “The winds have changed,” and issuers should “set [their] sails accordingly or risk foundering.”
Compliance will have its costs, but those who tackle the new disclosure requirements head-on can realize better market acceptance, lower interest rates and avoid potential problems.