SAN ANTONIO — Issuers that want to avoid disclosure mishaps — and possible federal enforcement action — should develop and closely follow policies as well as procedures that lay out who must review and sign off on their disclosure documents, Securities and Exchange Commission officials are stressing.

That message, above any other, came through loud and clear during the National Association of Bond Lawyers’ Bond Attorneys Workshop here last week.

“Often times the lack of appropriate procedures and processes can give rise to violations of the federal securities laws,” Elaine Greenberg, director of the SEC’s muni securities and public pension fund enforcement unit, told the lawyers, also stressing the importance of training issuer officials on disclosure.

However, Greenberg acknowledged that the SEC does not have authority to mandate issuers to put such policies and procedures in place. As a result, she was only recommending them.

Her remarks come after the SEC’s August lawsuit against New Jersey, in which the agency charged the state with violating securities fraud laws by failing to disclose to bond investors that it was underfunding its two largest pension plans. New Jersey agreed to settle the case without admitting or denying the SEC’s findings and said it would cease and desist from committing any further violations.

The disclosure woes were partly caused by a lack of communication between state officials who handled the state’s debt and those responsible for its pensions. In its settlement, the SEC specifically cited the lack of policies and procedures that would have required the two groups to communicate as a cause of the state’s negligence in violating the federal securities laws.

Specifically, the SEC said New Jersey was aware of the pension underfunding and its potential effects, but “due to a lack of disclosure training and inadequate procedures relating to the drafting and review of bond disclosure documents, the state made material representations and failed to disclose material information regarding” the funds.

Many bond attorneys were alarmed that this language goes well beyond previous statements from the commission. It has previously only commended issuers for adopting policies, procedures and training and recommended that others follow suit.

Specifically, in its November 2006 legal action against San Diego for failing to disclose major problems with its pension and retiree health care obligations, the SEC commended the city for subsequently creating a disclosure working group comprised of key city officials and outside disclosure counsel to review and ensure the accuracy of offering statements and any other document that reached investors. The city’s working group also has detailed disclosure controls and procedures that lay out who must review and sign off on disclosure documents within set time periods.

In a December 2007 speech, former SEC enforcement director Linda Chatman Thomsen recommended other issuers adopt these policies and procedures.

Asked how the language in the New Jersey settlement goes farther than previous commission statements, Mark Zehner, deputy director of the SEC’s muni and public pension unit, told bond attorneys Friday: “Understand, we do not have the authority, nor do I want to suggest, that policies and procedures should be mandated. We do not have jurisdiction to do that sort of thing nor do I think that we ought to.”

However, he stressed it is generally a good idea for issuers to have written policies and procedures, if nothing else to ensure continuity amid staff turnover.

SEC commissioner Elisse Walter, who addressed NABL members Thursday, said the New Jersey order was written in a manner that would lay out all the factors that contributed to the securities law violations and serve as a potential roadmap for other issuers who are potentially in the same situation. But she stressed it is not an attempt to mandate some system of internal controls.

Speaking on a panel earlier in the conference, Fredric Weber, a partner at Fulbright & Jaworski LLP in Houston, said that having policies and procedures and closely following them helps insulate the government and its officials from liability for mistakes in their bond documents. That is because unlike corporate borrowers, issuers do not have so-called absolute liability for any errors in their disclosures.

To successfully bring an enforcement action against municipal borrowers, the SEC must prove that they intentionally disregarded information they knew to be true.

But Dean Pope, a partner at Hunton & Williams LLP in Richmond, who spoke on the same panel, said a review of SEC enforcement cases shows that while it is helpful to follow good policies and procedures, they may not necessarily insulate a borrower against liability. Nevertheless, they are likely to lead to better-quality disclosures, he said.

Bond attorneys questioned Zehner and Municipal Securities Rulemaking Board executive director Lynnette Hotchkiss Friday about last month’s proposal  to alter Rule G-23 and ban a dealer from serving as financial adviser in a transaction, then resigning from that role and underwriting the same bonds.

SEC officials called on the MSRB to make the rule change even though the board had reviewed it twice in the past four years and determined there were no systemic abuses. Currently, the rule allows such role-switching as long as the dealer discloses that a conflict of interest might exist and receives the borrower’s permission.

One bond attorney asked why the board had not considered providing an exemption for competitive deals brought to market by small issuers that may only receive one or two bids on their transactions.

Though regulators believe that a new federal fiduciary duty makes it difficult for a dealer-FA to become an underwriter on the same transaction, the bond attorney argued that some borrowers could be shut out of the market or forced to pay higher rates on their debt as a result. In addition, fewer dealer-FAs will be willing to work as advisers and bond counsel may have to provide financial adviser services, he argued.

Hotchkiss said that the MSRB will closely follow what happens to small issuers.

“If there are small governments that are shut out of the market, that don’t get any bids or if they get one bid but the pricing is off, we are absolutely going to continue to look at that and make adjustments as necessary,” she said. “But right now it was considered that these governments are not fully able to appreciate that conflict and waive that conflict.”

Martha Mahan Haines, the SEC’s muni chief, who spoke on the same panel, argued that FAs are not doing their jobs if a transaction only receives one or two bids. But the bond attorney argued that small transactions may be structured in such a manner that they do not garner many bids.

Zehner, who also was on the panel, said that from an enforcement perspective, he has concerns that these deals are structured in a way in which the bids are rigged, and characterized the rule changes as an experiment that the SEC could revisit in a few year’s time. However, the attorney argued that concerns about rigged bids could be managed by vigilant bond counsel.