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Investment Company Institute Elements of an Ideal Disclosure System
The following outline summarizes the Institute’s position regarding the elements of an ideal disclosure system for the municipal securities industry. The outline consists of two parts. The first part focuses on the attributes of an ideal disclosure system and presents key features that should be reflected in the Municipal Securities Rulemaking Board’s (MSRB) proposed central educational website. The second part focuses on the process involved in developing the disclosure system, particularly the establishment of an advisory board to oversee the development of the central repository. This section also discusses the various guidelines and protocols that should be developed to ensure the successful operation of the disclosure system.
A. Attributes of An Ideal Disclosure System
1. Central Repository
Recommendation: The MSRB’s central education website (the Website), which is intended to provide useful information to the municipal securities marketplace, should be expanded to provide pre-pricing information and secondary market disclosure. In particular, the Website should make available the type of information collected by the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs) and other information repositories. Also, as discussed in Section A-7 below, the Website should provide hyperlinks to other websites where users can obtain additional relevant information relating to municipal securities issues. Moreover, in order to facilitate investor access, consideration should be given to enhancing search capabilities, such as providing a feature that enables users to sort data by different categories (e.g., by sector).
Rationale: Having a central location for receiving and disseminating primary and secondary market disclosure is a critical component to an ideal disclosure system. A central location would greatly facilitate access to important disclosure information and reduce the costs currently incurred as a result of a fragmented system. Certain features (e.g., hyperlinks and sorting capabilities) would maximize the utility of such a central repository.
2. Free Service
Recommendation: The expanded information should be provided to investors free of charge. Also, investors should not be required to fund the cost of developing the Website.
Rationale: Investors already receive primary disclosure information on initial offerings free of charge. Thus, investors should not have to pay for this information under a new disclosure regime. Nor should investors have to pay for secondary market information. Providing this information free of charge would help level the playing field with investors in the corporate securities market who enjoy free access to information in both the primary and the secondary markets.
3. Tracking Numbers
Recommendation: The MSRB should encourage uniform use of tracking numbers (i.e., dummy" CUSIP numbers) on preliminary official statements.
Rationale: The decision to invest in an issue typically is based in large part on a preliminary official statement. At the time the preliminary official statement is available, the bonds being offered may not yet have an identifiable CUSIP number, which often is not issued until the deal closes. The use of tracking numbers would enable investors to keep better track of disclosure relating to offerings of bonds, which do not yet have CUSIP numbers, for internal reviewing and monitoring purposes. Even though some, but not all, investors already utilize some form of tracking number system to distinguish among multiple issues, a single tracking number assigned to each issue would enable uniform identification by all investors.
4. CUSIP Numbers and Standard Caption Protocols
Recommendation: The Website should require that parties submitting information include complete CUSIP numbers (i.e., all 9 digits) with standard bond captions, and information should be retrievable by CUSIP number. Also, a standard caption protocol should be developed.
Rationale: The inclusion of CUSIP numbers and standard caption protocols would enable investors to more easily tie information to bond holdings. With proper identification, disclosure documents are less likely to be misfiled, which would help determine more reliably whether an issuer is complying with its continuing disclosure undertakings.
5. Disclosure Documents and Other Materials
Recommendation: The Website should make available all the information that is required to be filed pursuant to MSRB and SEC rules. Thus, for primary offerings, this would include final official statements (or preliminary official statements, as appropriate) and advance refunding documents. For secondary offerings, this would include all continuing disclosure materials provided under Rule 15c2-12, including annual reports, material event notices, and financial statements (including any audited financial statements, if available).
The MSRB should establish incentives that encourage issuers to submit to the Website information and material not currently required by MSRB and SEC rules. For primary offerings, this would include: (1) indentures; (2) loan agreements; (3) master trust indentures; (4) security documents; (5) legal opinions (tax, validity, preference, security, defeasance, Rule 10b-5, etc.); (6) tax certificates; and (7) certain escrow agreements. For secondary offerings, this would include events not provided under Rule 15c2-12, including: (1) material litigation pending or threatened; (2) material acquisitions or dispositions; (3) material casualty events; (4) changes in senior management; (5) change in control; (6) change in accountants; (7) loss of licensure for operation of the facility; and (8) bankruptcy or receivership filings.
The Website should also encourage issuers to submit information for all classes of securities, including securities not subject to Rule 15c2-12, such as variable rate demand obligations and certain continuous commercial paper programs.
Rationale: In order for the Website to be useful, investors need access to primary market information to make an informed investment decision. Investors also need access to secondary market information to appropriately monitor their securities portfolio on an ongoing basis.
6. Website Guidelines and Compliance Indicators for Voluntary Disclosures
Recommendation: To the extent that submission of data to the Website by brokers and issuers is on a voluntary basis, the Website should contain guidelines regarding the voluntary information that participating brokers and issuers submit. This would include format requirements and best practices. The Website also should include a mechanism that monitors compliance with such guidelines, and a rating system that enables Website users to determine the level of broker and issuer compliance.
Rationale: If compliance with the Website’s standards is not required by regulation, one way of incentivizing brokers and issuers to make use of the Website is to award a publicly available "good disclosure" rating to participants who submit information in accordance with the Website’s voluntary standards.
Recommendation: As appropriate, the Website should provide a link to issuers’ and trustees’ websites, as well as to those of other organizations, and regulators, such as the National Federation of Municipal Analysts (NFMA), the National Association of Bond Lawyers (NABL), the Internal Revenue Service (IRS), and the Securities and Exchange Commission (SEC).
Rationale: In order to maximize its usefulness, the Website should provide a link to other sites that provide valuable information on important developments. Links to other industry websites would enhance communication and understanding among market participants, which would lead to greater market efficiency.
8. Record Retention
Recommendation: The Website should enable users to retain the information by downloading and printing. In addition, information submitted to and retrievable from the Website should follow a consistent file format, such as Adobe Acrobat® portable document format (PDF).
Rationale: A widely diverse population is likely to utilize the Website. Their needs and desires with respect to the information they use are likely to vary significantly. Therefore, the Website should provide maximum flexibility.
9. Completed, Pending or Threatened Regulatory and Judicial Actions
Recommendation: The Website should include a separate section for completed, pending or threatened regulatory and judicial actions. Examples of relevant information would include actions by Federal and State authorities (e.g., IRS, SEC, Environmental Protection Agency, and State healthcare authorities).
Rationale: Oftentimes, important regulatory or judicial events are not disseminated to the municipal securities marketplace in a timely fashion, if at all. This information could be material to an investor, especially if it could impact the tax-exempt status of securities that were issued. Also, providing this information would help establish parity with the equity markets, which requires registrants to provide information on such events in a timely manner.1
10. Names of Transacting Parties
Recommendation: The Website should disclose the identities of each of the relevant parties to a municipal securities transaction, including relevant telephone numbers and email addresses. The list of transacting parties should include, among others, the issuer, any obligor, the underwriter, the trustee, bond counsel, underwriters’ counsel, special tax opinion counsel, and any credit or liquidity provider. Most importantly, the Website should include identifying information on any and all successor parties, such as successor trustees or substituted credit providers.
Rationale: Investors need to know the parties to a transaction, particularly substituted trustees who have ongoing responsibilities as to the securities, and bond counsel who deliver opinions after the issuance of the bonds, in order to properly monitor their portfolio securities. Knowing which party to go to for important information is a critical first step in keeping track of the status of an issue.
B. Process For Developing An Ideal Disclosure System
1. Website Advisory Board
Recommendation: The MSRB should establish an advisory board to oversee the Website. To maximize its effectiveness, the Advisory Board should consist of representatives of all segments of the industry. The Advisory Board would establish appropriate guidelines, mechanisms and protocols to facilitate use of the system by Website users. The Advisory Board would also review materials developed by various organizations, and recommend items or types of information for posting on the Website.
Rationale: An advisory board can effectively serve as the Website’s gatekeeper of important information for use by industry participants. Specifically, the Advisory Board would promote communication among market participants and would further encourage, when possible, coordinated analysis and action on matters that affect the entire marketplace (e.g., the effects of the revision to Article 9 of the Uniform Commercial Code).
In addition, the Advisory Board would facilitate informal discussions with other market participants when a group begins consideration of a new policy or approach to a matter. This informal discussion process would encourage a greater exchange of issues or concerns prior to a group’s implementation of a policy or approach. Although the informal discussions would not be binding, early identification of issues will enable such policies or approaches to better reflect the needs of the marketplace and, therefore, create a more efficient marketplace.
2. Timely Delivery of Offering Material
Recommendation: The Website should contain guidelines that ensure that investors have sufficient time to review an issuer’s preliminary official statement prior to making an investment decision. The guidelines also should require the posting of any subsequent changes to the preliminary or final official statement.
Rationale: Current MSRB rules focus on the timely delivery of final official statements, which typically are made available after the purchase decision has been made. Too often, changes are made to a preliminary official statement that are not readily ascertainable. As a result, investors must conduct additional due diligence in a short timeframe to identify all the changes that were made and analyze the effect such changes will have on the investment decision. The MSRB should seek to incentivize brokers and issuers to allow adequate review time between a customer’s receipt of the preliminary official statement and the investment decision deadline, and should facilitate review of any subsequent changes to the information contained in the preliminary official statement.
3. Date Stamping of Offering Statements
Recommendation: The Website should provide a mechanism that date stamps all incoming documents and financial statements upon receipt.
Rationale: Investors should be able to determine the timeliness of filed materials in order to appropriately monitor their investments.
4. Financial Reporting
Recommendation: Issuers should be encouraged to reduce the time for filing financial reports from 270 days to 180 days. Also, if audited financial statements are not available within the recommended timeframe, then issuers should be encouraged to issue unaudited financials in the interim, as appropriate, depending on the sector, in accordance with guidelines established by the NFMA. Moreover, the Website should provide notification when financial reports are filed beyond that timeframe.
Rationale: The current financial reporting timeframe is too long. When reported, the information is often stale. More timely reporting of financial information would enhance the usefulness of the information reported.
5. Late/Delinquent Filing Notification
Recommendation: The Website should contain reasonable time frames, as developed by the Advisory Board, in which material events should be reported. Thereafter, the Website should provide notification when material events notices are submitted beyond the established timeframes.
Rationale: Identifying timely compliance with continuing disclosure obligations alerts investors to those issuers who may be experiencing other more serious or systemic problems. For example, a "watch list" for bond issues experiencing payment or technical defaults or adverse tax developments would be a very useful feature. Moreover, establishing reasonable timeframes would be consistent with the practice established in the corporate securities market.2
1For example, Item 103 of Regulation S-K requires registrants to describe material pending legal proceedings in which they are a party, including the date instituted, the principal parties involved, a description of the facts alleged, and the relief sought. Item 103 also requires this information "for any proceedings that are known to be facts contemplated by governmental authorities."