Cross said that comments made by SEC Commissioner Elisse Walter at The Bond Buyer’s annual California Public Finance Conference on Oct. 19 were designed to call attention to ongoing failures by issuers to file timely, accurate and complete secondary market disclosures.
“It was a provocative comment that was aimed at highlighting challenges and weaknesses in the current system of continuing disclosure,” Cross said during a panel session at the National Association of Bond Lawyers’ Bond Attorney’s Workshop.
He noted that the SEC’s July 31 report on the municipal market included “a lot of data about significant percentages of issuers who do great on their primary offerings and then don’t …. pay any attention to the continuing disclosure aspect.”
Walter said during the conference, which was held in San Francisco, that “she is ready right now” to consider alternative methods to improve secondary market disclosure if the SEC does obtain legislative authority to set disclosure standards for issuers.
She said the SEC could consider rule changes that would prohibit dealers from underwriting bonds if an issuer had failed three times to meet its continuing disclosure obligations.
But Cross said the SEC isn’t moving in that direction.
“Is that a rule we are actively working on? No,” said Cross.
Cross was among five panelists who mostly discussed disclosure issues, including the SEC’s request, made in its report, for legislative authority to set the timing and content of issuers’ continuing disclosures.
Cross said the current regulatory system, in which the SEC regulates issuers’ disclosures indirectly through dealers, is “awkward” and “tortured.”
The SEC’s Rule 15c2-12 requires dealers, before underwriting bonds, to determine if the issuer has agreed in writing to disclose annual financial and operating information as well as certain events when they occur.
Cross said the recommendations in the SEC’s muni report are not radical or extreme. The report does not recommend “super-detailed, corporate style” disclosure guidelines, but rather “baseline standards” that would be designed to be applicable to a wide variety of issuers, he said.
Panelist Dave Sanchez, another lawyer in the SEC’s muni office, said baseline secondary disclosure standards would give issuers “additional markers” to help them identify the material information they need to report, and make it easier for issuers and regulators to determine whether they violated rules.
Another panelist, Joseph E. Smith, an attorney at law firm Maynard Cooper & Gale PC in Birmingham, Ala., said baseline disclosure standards could be valuable to some small issuers, like rural school districts. Unlike states and other large governments, small issuers often have limited interaction with rating agencies, underwriters and other market participants. As a result, they might not know all the types of information they should include in continuing disclosures, he said.
“If properly crafted, I feel like baseline disclosures could be a great aid to smaller issuers,” Smith said. “If there were a clear articulation of what was expected for them, it might actually be helpful for some small issuers.”
Panelist Marc Greenough, an attorney from Seattle, Wash., with Foster Pepper PLLC, said smaller issuers might struggle to comply with baseline disclosure standards. He noted that governments in Washington state are required under state law to have financial information audited annually by a state auditor. As a result, issuers can’t file annual disclosures with the Municipal Securities Rulemaking Board until the audits are complete.
If the SEC sets a filing deadline, issuers might need to hire a second auditor to complete the job sooner, he suggested. That expense might not justify the benefits of tax-exempt financing and might lead some issuers to turn increasingly to direct loans from local banks, Greenough said.
Cross noted that the SEC’s report was initially a staff report, but became a commission report and was signed by all five commissioners.
That’s significant, Cross said. “It suggests pretty notable or strong consensus on the general approach.”