The Brave New World Of Ongoing Disclosure
By STEVE SCHRAGER & DIANE SCHENKMAN
Last November, the Securities and Exchange
Commission (SEC) adopted amendments to Rule 15c2-12 concerning the ongoing disclosure obligations of
municipal issuers and underwriters. The rules usher in a
new era of disclosure obligations that will have a direct
impact on local governments.
The amendments encompass two key prohibitions.
Underwriters and dealers may not buy or sell municipal
securities without determining that the issuer has
agreed to provide annual financial information and notices of material events to the market, for the life of the
debt. The new rules also make it illegal for underwriters
and dealers to recommend the purchase or sale of any
municipal security unless the dealer has procedures in
place to monitor the disclosure of any material events
regarding that municipality.
In other words, local governments must promise in a
written agreement or contract, to provide financial information on an annual basis and information about
material events on a timely basis, for the benefit of
bondholders. Issuers that do not enter into these agreements will find their access to public debt markets
severely limited. Municipal dealers and underwriters
cannot buy, sell, or recommend municipal securities
unless they can show that they are monitoring the disclosure of all this information.
Although the SEC did not specify what annual information issuers should provide, it indicated that it
should mirror the information in the primary market
offering statements. For example, if a hospital includes
in its offering statement information about annual admissions, it must continue to provide that information
on an annual basis. The SEC also said that issuers should
not simplify their offering statements in an attempt to
make their ongoing reporting easier. The level of information currently provided in the offering statement
must be maintained.
All local governments that bring debt to market
starting July 3, 1995, must provide the specified financial and operating information for fiscal years beginning on January 1, 1996, or later. Local governments
that contract with an underwriter for a debt issuance
prior to July 3 do not have to comply with the requirement — even if the securities are issued after that date.
Municipal securities broker dealers must have
procedures in place to monitor ongoing disclosure by
January 1,1996.
Focus on Huge Secondary Market
With these amendments, regulatory focus has made
a major shift to the secondary market.
The SEC has chosen to focus on the secondary
market because of its size — $1.2 trillion of tax-exempt
bonds are outstanding — and because individual investors own the lion's share of the market, directly or
through mutual funds.
With the shift come a host of entities — some new
and some not so new — positioning themselves to
gather all this information from tens of thousands of
issuers, and preparing to distribute it as the marketplace
calls for it.
NRMSIRs: The New Game in Town
In 1990, the SEC designated three organizations as
Nationally Recognized Municipal Security Information
Repositories (NRMSIRs): the Bond Buyer, Bloomberg,
L.P., and J.J. Kenny. Their primary function was to
relieve broker-dealers from the responsibility of providing official statements and escrow documents to the
public for 90 days from the offering date. If the broker-dealer filed the documents with one of the NRMSIRs
and to the Municipal Securities Rulemaking Board, the
broker-dealer only had to make the documents available for 25 days.
In the new world of ongoing disclosure, however,
NRMSIRs have a much broader role and must meet
specific operating criteria. All three existing NRMSIRs
will have to reapply for NRMSIR designation.
Municipal entities will be required to provide annual financial information and operating information to
each and every NRMSIR — no one knows yet how
many there will be — and to State Information Depositories, if there is one in their state.
In addition, information about material events must
be sent to each NRMSIR or to the Municipal Securities
Rulemaking Board and the appropriate state depository, if there is one. •
Steve Schrager is a vice president in the Investor Relations group.
Diane Schenkman is a vice president and manager of the Great Lakes
Region ratings group.
June 1995 / Illinois Municipal Review / Page 11
|