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U.S. Securities and Exchange Commission

Panel I: Current Disclosure Issues in the Primary and Secondary Markets

2000 Municipal Market Roundtable
October 12, 2000
Washington, D.C.

United States Securities and Exchange Commission
Office of Municipal Securities

Ms. Haines  – Welcome back.

The first panel put together on various disclosure issues in the industry, and we have a number of eminent people from the industry who have agreed to participate. I'll go through their names quickly. As I do, raise your hand or something.

Mark Brown is here. He is the vice president at the Bank of New York in the corporate trust department, who will give us the perspective of a bond trustee.

Rafael Costas, the senior vice president at Franklin Templeton Investments. And, of course, will be sitting as the institutional investor perspective.

Bob Donovan is the executive director of Rhode Island Health and Educational Building Authority, an issuer.

Denny Drake is the general counsel of the Iowa Health System. Both an issuer and a lawyer's perspective.

Bob Foran is the senior managing director of Bear, Stearns & Co., and will give us the underwriter's perspective.

Drew Kintzinger is a partner at Preston Gates & Ellis, a law firm in Seattle, who will give us the non-lawyer's perspective.

Helen Gee is the president of Metropolitan Washington Chapter of the American Association of Individual Investors and will give us the individual investor's perspective on these topics.

And finally Dave Fredrickson is an assistant general counsel here at the SEC.

And my co-moderator is Stephen Weinstein. He is also an attorney-fellow in the Office of Municipal Securities.

Please keep in mind my comments here today reflect my own point of view, which is not necessarily shared by my colleagues on the SEC staff, or by the Commission. And this is true of the statements made by all of the Commission staff here today.

Before we start, I just wanted to mention that we encourage you to give us your questions. In order to manage it a little bit, we have put cards and pens out on the table over at the side, and you should just pass them up or bring them up here to the front and we would very much like to hear from you.

Mr. Weinstein  – And I guess just a word to my colleagues up here. There's this little button on the microphone and if you don't flip it nobody can hear you. And I'm the worst violator of that rule.

I guess Jim Lebenthal really set the tone for what could descend into a great technical conversation here among all of the market participants and professionals. But I think we should keep the big picture that he raised. This is why we're all here. What the bonds and other securities that are sold into the market really do. Keep that big picture in mind, because we're really talking, as we use all these wonderful terms, like continuing disclosure, low 15C2-12, and 10b-5, et cetera, we're really talking about communicating. That's the system that Congress mandated in the 1930s for the municipal market, and that's the system that it reaffirmed in the 1970s for the municipal investor.

Communication is the goal here. So I urge all of us to focus not just on the minutia or the prevailing practice, but to keep asking ourselves the question, "Are we getting through? Are we complying with the spirit of the law, the spirit of the rules, as well as with the specific?"

And if we accept that as a standard for all of us in this discussion, let me start by asking Mr. Costas to really begin to answer that question. Is communication working from the standpoint of the institutional investor? And let's ask Helen Gee to answer the same question from the perspective of the individual investor.

Mr. Costas  – Thank you again for having us.

I think in our experience communication has been working. I mean it's been working slower than I think a lot of us would like to see, but it's working positively and I understand -- I've been involved with the SEC now for about five or six years working for the NFMA. There has been hesitation in some of the members of our industry to move to where we wanted them to move, yet I think over the last three years they've taken a baby step here and there and have taken a step and nothing bad happened. Take another step, nothing bad happened. And you're seeing now even people that NABL, who were sometimes at odds with us, actually also started coming around from our perspective, continuing disclosure, increased disclosure and voluntary disclosure and secondary market disclosures. So we've been generally pleased.

The one sector that we've had most trouble with, at least at Franklin, have been to the health care sector. And even there we have seen some improvements as well, in particular when it comes to providing quarterly financials and access to CFOs and industrial relations people.

So I think in general, yeah, I'd give the market positive marks.

Mr. Weinstein  – Just a quick follow up to that. How much of that comes by virtue of the operation of rules and practices and how much of it comes because of the leverage that you exert by virtue of your institutional position.

Mr. Costas  – I can't quantify, of course. I know that a lot of it does come from leverage, especially with pricing, but you'd be surprised how little leverage institutional investors have had also on the secondary market, which is some of the reasons why the NFMA was so active on this. And coming to see Paul over the last few years, is because he knew we were having problems and what I didn't like sometimes was the feeling that I was getting information because I was bigger than the rest, and that's not right either.

We've always called issuers and we share the stuff with the SEC. Is that you should be telling me anything that you should also be telling an individual investor, should they ever call. I mean as Mr. Lebenthal said, sometimes it's people at the individual level who don't read the materials or don't bother to call. But if they do, they ask the same questions that I ask. They should get the same answers that I get. Now, we at the institutional level get paid to do that, and we make it part of our job to call and get information but we always want to make that clear, that whenever there is hesitation to get information, we do always refer them to any language that comes with the regulations, from the regulatory bodies or that's out in the press. And say, you know, "This is being backed by the Government now, and you need to do this."

And the issues we have had is -- and I'm sure we'll talk about this later -- is you get to a minimum level of disclosure whereas what we say is you should follow the spirit of the law and not the word-by-word interpretation of the thing, given bare minimum. That's almost useless sometimes.

Mr. Fredrickson  – Could I ask a question?

That if you talked to an issuer and get some information, have you ever seen the issuer then put out a press release or give that information out to the marketplace?

Mr. Costas  – I have not seen that because I usually don't follow through on that. I mean I get my information. I'm assuming, I'm hoping, that the next person who calls asks the same question and gets the same answer. But, you know, I'm trying to get a competitive advantage too. I'm not going to go tell all my other competitors, "Call them, because now they're telling you this." That's the nature of argument, being competitive. So I don't see that, but I honestly don't know -

Mr. Weinstein  – And, Helen, I think Jim Lebenthal referred to what I would call the phenomenon of sending the message but you can't really receive the message of people. That's up to individuals.

From your perspective, as somebody who represents people investing in the market on an individual basis, is the message that's being sent clear enough and broad enough for a reasonable investor to receive it?

Ms. Gee  – From my own perspective? Most assuredly. I'm really here, however, to listen and to give their perspective on the municipal market because one doesn't discuss this kind of thing very much in our investor groups. So we need information of this kind. I must say, I'm tremendously impressed with what the NABL has done in discussing the issue and in making it available, a general discussion of the status of affairs at the present time. I think following through on that is of great importance.

I also would like to raise the question of whether or not the SEC has ever considered whether or not there ought to be a broad program, an evaluation program, to assess any major changes in the direction of requirements. We used to do that kind of work, so I'm especially interested in whether or not it might be a feasible kind of issue to proceed.

Mr. Kintzinger  – Steve, I was just going to comment that I think the transition, hearing from Rafael and then from Helen, is a telling one because for many market participants in this room who have worked on primary and secondary market and disclosure issues over the past 10 years. I think back in the late '80s there was a realization that the market was shifting from a traditional institutional-only buy market to an increasingly retail investor market. And in concerns about timeliness of disclosure and dissemination of disclosure in the late '80s led to Rule 15C2-12. And then subsequent to that time, and as a follow up to that rule, concerns about continuing disclosure became a preeminent importance.

And many of you in this room in '93 and '94 that worked together as market participants to work with the Commission in some kind of plan to enhance the flow of information to the secondary market. And the underlying premise of that was that not only the institutional investor had concerns about receiving information, but also the retail investor as well. And we've now progressed to a point where the questions that market participants are dealing with are questions pertaining to annual information, material event disclosure under Rule 15C2-12.

Secondly, how to deal with the ad hoc inquiries that are coming in to issuers and to underwriters, how to deal with those. And, third, the whole concept of disclosure beyond the continuing disclosure requirements of 15C2-12 and in that context, with the National Association of Bond Lawyers did approve and release a paper just last month about voluntary communications with the secondary market on this information.

But the spirit I think was in 1994 with the continuing disclosure amendment, came up with a reasonable regulatory scheme that so happened because of the unique situation of state and federal common issues with the avenue for that was through Section 15c in the broker-dealer side, but the Commission came up with a regulatory scheme that market participants shared in the development of and combined that with an enforcement scheme as well, so that hopefully the combination of reasonable regulation and responsible enforcement would enhance disclosure.

And I think we've gotten there. I think the experiment -- well, it continues to be fine tuned and is a successful one.

Mr. Fredrickson  – I think responding back to Helen's question about the SEC. I think what's changed and the SEC has always been interested in disclosure issues, including the municipal securities industry. I think until recently though it was more driven by crisis. That it was New York, it was WPPSS, it was a variety of market failures that prompted the SEC and Congress and others to examine practices and say how can we do better.

I think what's changing now, what's driving it, is both technology and the availability of information as well as, as has been mentioned, the presence of individual investors, which is changing all the securities markets. And those two forces are now driving the analysis as opposed to how do we correct the next big failure.

Mr. Weinstein  – Thanks, David.

I think the first three or four speeches here have pretty much set the stage for what should be a lively interchange of views, to take that phrase out of the diplomatic community.

We heard from bond counsel a very good segue I think into -- and from David, what's driving the sense of change, the sense of broadening the market, the sense of new information, new ways of transmitting information. And we heard from bond counsel a rather encyclopedic reference to very useful best practices that are being developed by PFOA, NABL, the lawyers, the finance officers, TBMA, the Bond Market Association, and the National Financial Managers Association.

And we heard from Helen that perhaps we, the Commission, ought to be taking this all in and thinking about what's happening in the market, and I would like to encourage that part of the discussion as we go forward.

Martha, do you want to pick it up?

Ms. Haines  – As you all know, disclosure deficiencies most often seem to come to light when investors actually go back and read that document, which is when it deals with defaults, or when an industry is undergoing a particularly stressful time. And right now hospitals and health care systems have been experiencing what Moodys recently called "ongoing credit deterioration."

And, Denny, I wondered if you could speak to this. Denny is associated with a very healthy health care system in Iowa. But, you know, many of the issues like labor shortages and increasing drug prices and struggles between providers and payers, affect everybody in the market.

How have these new stresses influenced your disclosure documents or your voluntary ongoing investor relations program?

Mr. Drake  – Well, the difficulties of the industry make those disclosure documents more difficult to draft. Our approach to disclosure, and we just were in the market earlier this year, and this changing nature of who the buyers might be work together to I think in a positive way create a broader scope of information that's made available on a more regular basis. You know, we are a quarterly, pursuant to this last issue, at the market buyers' requests, making quarterly financial information available and this document from the Association of Bond Lawyers is very useful for an organization such as ourselves to figure out how to most appropriately make that additional information available.

But the stresses on the industry in relation to what is disclosed and when is it disclosed makes difficult questions for our bond counsel and myself at times, depending on what the nature of an inquiry from the Government, as an example, might be and is that, under a continuing disclosure agreement, something that needs to be disclosed or not. And we look at those words very carefully and try to make the best judgments that we can.

So the industry stresses are there in our predictive, and they're likely to continue, and it just requires vigilance on what the disclosure documents say to assure that the obligations are met. And the instruction that this panel or groups here can lend to a borrower, such as ourselves, come to that. We're interested. We're generally interested in making that information available to investors, and as the investor groups become more retail, we want to be able to provide additional information as needed so long as we can do it within the constraints of resources that we have so long as we can do it within the regulatory framework for accuracy and timeliness.

But from our position, we are not reluctant to make the information available from a disclosure standpoint.

Mr. Fredrickson  – Could I ask how you make the information available? If it's not 15C2-12 material, what other ways do you usually get the information?

Mr. Drake  – Well, two things on that. One, we're new at the process, as the issue just went in April, so from a quarterly disclosure standpoint, our whole method and process, because we're putting that disclosure on the Internet, we're still refining it.

But we disclose information in working with bond counsel to determine what the nature of the information is in relation to the scope of the information, materiality information that needs to be provided.

Currently what our quarterly disclosure responsibilities include are consistent with what the rules require. And beyond that, I don't think we're disclosing anything other than what the rule provides right now.

Now, anecdotal inquiries and so on, NABL guidelines are very useful. We have, of course, a disclosure person identified, but some of the information there about record keeping and further disclosure and so on, I can't give a very good definition to you. I don't know of any inquiries we've received that would require broad disclosure.

So I probably don't have a very good definition at this point about how we would acquit our responsibilities if an inquiry is made.

Ms. Haines  – Denny, does your continuing disclosure agreement require quarterly as opposed to annual information release?

Mr. Drake  – No, it doesn't.

Ms. Haines  – But you're doing that on a voluntary basis?

Mr. Drake  – Market driven, yes.

Ms. Haines  – I've seen a lot of that on your Web site, utilization statistics as well as unaudited step-period financials.

Mr. Drake  – Yes.

Mr. Kintzinger  – I think that's an important point that under the regulatory scheme what was contemplated was that there would be so called annual financial information, implying that this updated financial information would be on a once-a-year basis and no specific time frame was set for when that annual financial information needed to be provided.

Yet we've seen in the housing area, a single family and some multi-family now in the health sector, response from these borrowers and issuers to provide the continuing information on a more frequent basis voluntarily. In effect, proof again that the voluntary nature of the market participants, which was assumed in the rule, is working.

Mr. Costas  – Well, I would say to that, while I'm happy for that, I'm also not going to kid myself, and I know that the health care sector in particular has to do that to sell their bonds. They're been having a tough time the last two or three years. And while we appreciate it, they weren't doing it voluntarily when things were going really well for them.

And usually it's going to be the other way around. When you have a system that's doing really well, they have no problems disclosing information, there's a good story to tell. But it's the people who are having problems, the little issuers, that eventually had the likelier chances of defaulting that that is where we have the problem, both on the institutional side, and I'm sure that if I'm having problems, the individual is doing the same.

So it's been a seller's market in munis for the last few years, but it hasn't really been a seller's market in the health care market, and because of that, we've been able to finally get some of the things that we've been asking for, well, before 1994.

Mr. Weinstein  – Part of this discussion, I'd like to hear from you in a second, but part of this discussion brings to the fore the precept that the federal securities laws in the area of municipal securities set a threshold, set a minimum for compliance, but that issuers and other participants are free to go beyond the requirements of the law, into the area of voluntary disclosure, so long as it meets the standards set by the Commission and the courts.

And what I'm beginning to hear in this discussion, that there is a reaching out on the part of both sides of the transaction to meet greater expectations from this more democratized market and I think it would be helpful to us to hear the other participants' views on this disclosure, continue disclosure, beyond what Rule 15C2-12, by its own terms, requires.

And I'm sorry to cut you off.

Mr. Foran  – The real concern that's been expressed to me by people on our research area, who really do not do primary market research, but the secondary market research. There's bonds available in the marketplace. Can you tell me a little bit about these bonds? That type of inquiry comes from salesmen or customers.

The concern has to do with issuers that want to limit the disclosure to existing known bondholders.

And we'll put forth information, not the annual information statement information, or even quarterly financials. But we'll do a periodic conference call, but then limit the conference call participants to people that they know own bonds.

Now, one, if you know anything about the marketplace, you never know who exactly owns your bonds at any point in time.

Two, you don't know what broker-dealer might have bonds in their inventory that they're going to be offering to customers.

Three, you don't know what institutional investor currently owns bonds and plans on selling those bonds for another institutional or individual investor who is considering purchasing those bonds, might like to have that information made available to them.

Particularly in an area like health care, I can understand why there may be some concerns about having just a broad-based open forum -- in that there might be a concern that some type of strategic information, competitive information, might get out there. One could argue it doesn't affect bondholder security perhaps, but it certainly does affect the current operating strategy of a hospital or a system.

Now, I can understand those types of concerns. But I really don't understand how we can have information being made available and then limit it in these conference calls to only people who are pre-approved. It's just something that we're going to have to work our way through.

I think probably one of the best ways of addressing that would be if the institutional investors, who hear about it often before even other broker-dealers hear about it, because the banker may not know about it, or something like that. Would say, "If I cannot participate in this conference call because I don't own your bonds, I'm certainly not going to participate in a conference call the next time you have one," being a broker-dealer-sponsored conference call, "if you want me to participate when I do own the bonds."

So I think that's about the only way, other than just saying, "Fair play, fair dealing." Information should be made available to everyone if information is being made available at all.

We just need to enforce it by having the institutional investors saying, "I'm not going to participate when I do own the bond, which is helpful to the issuer, helpful to me, if you don't open it up even when I don't own the bond."

And that really is about the only major concern about secondary market information that we're hearing on our desk.

Ms. Haines  – We've had two questions passed up about Reg FD which relates to selective disclosure. And as you probably know, Reg FD does not apply in the municipal market.

On the other hand, it does raise all of these issues of giving preferential treatment to one group of investors or individuals in the market over others.

And the Commission did state when it released it, that basically it's an issue of fundamental fairness. It wasn't made a rule, but isn't it only fair that more information be made available on an equal basis?

I'm wondering what Mark Brown -- what have you been seeing from the trustee's perspective as we're going through this changing time?

Mr. Brown  – Now, I think the trustees initially when the Rule 15C2-12 came out. And our role is primarily limited to secondary market disclosure where we are the continuing disclosure of the dissemination agent.

And we're finding a heightened interest in the topic but we're finding that there hasn't been, or it appears to us there hasn't been, a significant amount of compliance with the continuing disclosure requirement.

We did an analysis of bond issues in the State of Georgia since the middle of 1995 forward, and took the issues that had come to market and compared that with the NRMSIR database, and we found that only about 15 percent had actually complied with the 15C2-12 filings.

You know, that said, we have heard more and more about the continuing disclosure issue and felt that we needed to become more proactive from a corporate trust perspective, which includes educating our administrators to be asking questions at the time of closing. Who was going to be the dissemination agent? Who's responsible for continuing disclosure on this issue?

And you'd be amazed at the variety of responses that we do get. Sometimes it's the trustee. We found that about 15 to 20 percent of the issues that we're trustee for we're asked to be the dissemination agent. But other times, it's the issuer and our research has shown that there really hasn't been broad compliance with the continuing disclosure requirement.

Mr. Donovan  – If I could just follow up as an issuer. I mean truly we're a conduit issuer. So we have somewhat less controls. But when we do a bond issue, you know, we have the borrower, would be the hospitals, universities, signing the agreement with the trustee. Also providing continuing disclosure information. And also the trustee acts as the dissemination agent.

What we're seeing in some of the health care areas and to get back to what Rafael said, it is investor driven.

I mean the quarterly financial statements for the hospitals is something that we're just standing back at it's going to be a requirement that they provide the insurer or the investor, or they're not going to provide the bond. And it's getting, you know, because of the crisis in health care, it's been more difficult to sell health care bonds.

Now, the cycle might change, you know, and five years from now where, you know, they won't be requiring quarterly statements anymore and go back to the annual ones.

But I just wanted to make a point about the Regulation FD that when they did come out with it and it doesn't apply to the municipal marketplace, but clearly if an institution is providing quarterly information to the investors, I mean it's something that they should just adopt and provide to a much broader base.

I mean I know there's a panel later today on the Internet, but I know every hospital in my state, you can go to the Internet and you can find out about their doctor quality, about their competitiveness, you know, so there's so much information out there that it's almost sticking their heads in the sand if they don't really take an active investor relationship position, and provide as much information as they can.

Mr. Kintzinger  – One comment, briefly, Mark. I think that one thing we're hearing is that -- I mean this municipal market has always been one of diversity. The figure of 52,000 issuers keeps being used. In fact, I've seen more recent figures that suggest governmental issuers number as much as 70 to 80,000 now. And, in fact, the NFMA, in their best practices for health care, reflected they're in the single stand-alone hospitals, there can be more complex hospital systems, there can be obligated groups and the like.

But the legal playing field, given this diversity, is that we know we have Rule 15C2-12 with annual financial information, and material event notices that should be recorded. And in connection with those requirements, there has been uncertainty on the issuer side about how to deal with ad hoc inquiries about that information. How to know that selective disclosure to some but not to all is appropriate or not appropriate. We deal in an area that's governed really by case law and concerns about selective disclosure and insider trading, an area that's not easy to define precisely for governmental issuers from small townships all the way up to very sophisticated court issuers, for example.

But I do think, and NABL reflected this in their recent paper, that there is some growing consensus that in connection with 15C2-12, continuing disclosure obligations, that once that information is in the market, clarifying that generally available information may very well be appropriate.

I think it's also pretty well accepted that if there were erroneous statements made in connection with primary disclosure, you'd correct those statements.

If there were perhaps in the context of getting ad hoc questions, you realize that something may have been misleading, it's appropriate to supplement the disclosure to correct any misleading statements.

Beyond that, we get into the whole area of a duty to update. And there is uncertainty there. But what I do see is between the market participants and the enforcement actions, an approach that NABL also reflected in its paper, which says there aren't rules that tell you you have to do it, and there aren't rules that tell you you are prohibited from doing it.

The best place to end up is the happy medium of perhaps it's something you should do because the more information you get into the marketplace, the better off everyone will be legally and non-legally.

Mr. Donovan  – And just one more point I just want to make about 15C2-12, is that that only applies, or we've been told, is that only applies to our fixed-rate transactions. We're seeing more and more variable-rate bond issues. And I know in areas such as industrial development bonds, even some of the companies aren't providing financial information because of the variable-rate issue. And there's no requirement for continuing disclosure.

Now, in some of our variable-rate deals, we include an agreement but it's almost like a stringing agreement, where if they were to convert this variable-rate bond to a fixed-rate deal, then they'd have to follow in a disclosure. But we're also seeing more and more in lower thresholds in terms of dollar amount to, you know, quote/unquote "sophisticated investors" of variable-rate bonds, which is subject to the continuing disclosure area.

So I mean there's a whole area out there that isn't being addressed by this particular continuing disclosure area.

Mr. Weinstein  – What I find most interesting about the discussion so far is that it has almost unanimously and instantly defaulted from issues of primary disclosure and even sector that might be stressed to the whole host of questions around continuing disclosure. Well, 15C2-12 involving practices, involving expectations, questions.

Now, Mr. Donovan and Mr. Kintzinger have just put a rather impressive agenda on the table. Is there a view at that end of this table that perhaps the industry, the underwriters, the lawyers, the brokers, the issuers, ought to take a concerted look at 15C2-12 or more specifically the principle that underlies it, the principle of continuing disclosure to investors?


Mr. Kintzinger  – I mean I will offer experience from both the primary disclosure point of view and the secondary market disclosure point of view. I have never seen the level of participation in the primary disclosure process higher. That's not to say it's perfect. But in terms of working groups, going through the analysis of what will be important to an investor in making an investment decision to buy this bond, the materiality analysis, I think there's a high level of engagement in that primary disclosure process. I for one anecdotally, I have not seen to date any effort in a drafting session to minimize primary offering disclosure in hopes of subsequently minimizing the continuing disclosure obligation, i.e., you know, curtailing financial information and operating data initially to avoid those concerns later.

If anything, I've seen primary disclosure grow and increase in body to the point where I sometimes have a concern that too much is being put in, that it will confuse rather than inform the investor.

On the continuing disclosure side, a more cynical view would be that continuing disclosure has become boilerplate, that it shows up in pretty routine covenants in bond documents, gets disclosed in a routine format in the Official Statement. After the deal closes, it's presumably in the hands of the trustee or the dissemination agent, and it happens, and no one knows precisely when and how it shows up and it's used, but that the process works.

I think that's an overly cynical view only because in daily practice, I, and I know others, are routinely asked questions, "The issuer called with this question. Do we think we have a material event notice? Is this something that's one of the 11? Even though it's not one of the 11, should we be going to the market and saying something about it?"

I see that process happening, so I don't feel that I -- my sense overall is that 15C2-12, both in primary and in secondary is pretty well gauged to what was anticipated when it was promulgated, which is that market participants, like many of you here, will respond to that rule if it's by the investor side prompting, "We need more," or if it's by the issuer side saying, "We're going to offer more." There seems to be a voluntary effort to get there without further regulation.

Ms. Haines  – I have a question.

Under 15C2-12, we set up the NRMSIR system. And perhaps, Rafael, you could address this first. But what's your experience been with the NRMSIR system?

Mr. Costas  – None. I will never pay for information. That's my right now. I am an investor. I lend you my money. That's $25 please.

From the beginning I have never like the NRMSIR idea. We didn't have a use for it because of our size, to be frank. We didn't really need to use it as much as a smaller participant or a retail participant. I understand why brokers would use it and make a market in the secondary issues.

But for us, we are on record. I'll take it back. I think one time we had to pay. And it tasted like you can imagine. But it was over my dead body pretty much, and we still hit it. It's just, you know, any other stake holder of any business in the United States, especially in the corporate world, has the right to get free information of other stock holding quarterly. They can get it when there are material events. They don't have to pay for it. If they did, I doubt very much any of you here would buy a bond issue if you knew up front that you had to pay $25 to get information about your investment.

These issuers are accessing public markets. Up until this year, they pay less to access that market than any other issuer in the corporate world, and now they want us to pay to get information. And absolutely we will not pay them for that information.

This is the standard we had before the Internet. The Internet has been a blessing for both sides because it makes it easier toward the NRMSIR issue. At very low cost I think, an issuer can establish a Web site where they can post that information and we can access it for free, print it. And all that does is whenever we do call you as an issuer, it makes the conversation a lot smoother, a lot more efficient. We're not fishing around for ideas in the middle of a call. We've read your statements and we know what we want to ask and we'll waste less of your time.

So the NRMSIR for us has been a non --

Ms. Haines  – Well, we appreciate your candor. Let me just ask the question that you just answered but I'd like all the non-SEC people at the table to take a crack at this plain English question. Does the NRMSIR system work?

Mr. Kintzinger  – Yeah, I want to answer that and follow up on Rafael.

I think that we really are seeing a shift in the issuer community and in the counsel community away from concern about NRMSIR and much more about the Web page and the Home Site and the electronic disclosure aspect of it.

We close a bond issue, and the continuing disclosure obligations fall into the hands of the trustee or into the hands of the disseminating agent and but for the situation where an issuer is actively involved with the financial advisor who's carrying out disseminating information duties, a lot of issuers say, "It went in but we don't know where it ended up. And we don't know where it's being used."

What's very real to them is the electronic disclosure aspect which will be another panel this afternoon, but that's a fundamental shift. And my friend, Dean Pope, wasn't being cute when he said in September at the bond attorneys workshop, just to paraphrase him, you know, "A lot more people have access to the Internet than to the NRMSIR systems." So let's shift the focus to the electronic side of this equation. The NRMSIR is there and it carries out the rule but the issuers don't feel in touch with it. They do feel very much in touch with the electronic disclosure.

Mr. Donovan  – Yeah, I have to agree with that. I mean the only thing that's changed really in our continuing disclosure agreement has been the list of NRMSIRs. I mean it's gotten smaller and smaller. And the information is probably dated, and I have to agree that the Web sites, the Internet, is really what's having more impact on the dissemination of the information for all the issuers and the borrowers.

Mr. Foran  – Well, being the regulated party here, I have to say the NRMSIRs are critical to our business because we have to check and make sure that nothing has occurred if we're going to be offering something in the secondary market.

That doesn't mean that it's the best information and the easiest way of getting information. But it is what we have to deal with in a regulatory environment. So, yes, we use it.

Mr. Brown  – From the trustee's perspective, in those situations where we are dissemination agent, our relationship with the NRMSIRs has changed. As someone pointed out, the number went from seven originally down to two and now I think there're four.

A lot of the information that we forward to NRMSIRs heretofore has been paper based. Some of the smaller issuers provide us with annual reports that we would send to the NRMSIRs, and there is a change going on at the NRMSIRs where they want to receive the information electronically. And that may speak to why the statistics that I mentioned earlier in Georgia, seeing that there's such a low rate of compliance, is that perhaps some of the paper information that has been sent to the NRMSIRs hasn't made its way onto the NRMSIR databases.

Ms. Haines  – A question about smaller issuers, which I think makes up most of the municipal market of the 52 or however many thousands.

In REG FD, for example, there was the suggestion that if you had something, some information to release, you put our a press release, among other things.

But who's going to pick up the press release about the increased water rates in small town America? What the NRMSIR seems to me to be useful for issuers like that on a voluntary basis, issuers that maybe don't have a Web site or are very unsophisticated, can any of you address if you've seen it used in that way by the smaller issuers or other small issuer concerns?


Mr. Donovan  – And just speaking from a conduit issuer standpoint. It's a good avenue and it gives somebody a benchmark to provide the information to. Whether it's an increase in water rates or -- I don't think any small municipality or small local government really sees it as the type of information they need to provide to the NRMSIRs except on an annual basis.

So I don't know how interactive they are because with any issuer or with any borrower, that's something they have to do but it's not their day-to-day business.

And I really -- I think we need it and as Bob says, you know, he needs to use it continuously, but I think it's just really a starting point.

And the other information, you know, you mentioned the water rates. I mean you can probably go to that local town newspaper and see how the city council was lynched because of the increase in the water rates.

So I think, as everybody says, it's just a starting point and I think 15C2-12 is just a starting point. And, you know, we're basically using other people's money and if we're going to keep that system working efficiently, then I think borrowers and issuers, you know, just have to realize that demands are changing for the information, and we just need to accept it and try and do it in the most efficient way.

From our operating standpoint, I mean I know the analysts came out with some suggested practices. For some small issuers that's a little more burdensome than others, but I think it's a step in the right direction. And so it's just the way the market's going. I think we just have to accept it. Nobody is just using municipal bonds these days for building a new courthouse. I mean the municipal bond is being used for everything, and I think the investors need to know, you know, what they're purchasing, what the source of repayment is, and to be continuously updated, you know, "Did you get that football team you were going after?"

So I think it's a good starting base for it. There's a lot more to be done.

Mr. Kintzinger  – Martha, one thing that NABL tried to do in its September statement it released on communicating voluntarily to the secondary market was to reflect the reality, at least in NABL's ranks, its members advised issuers who, again, range from small townships to the most sophisticated, and in this paper they have a list of nine factors to use in developing an ongoing disclosure program that may step beyond the four requirements of Rule 15C2-12. And to me, the most important factor in those nine was the recommendation that in developing disclosure beyond Rule 15C2-12, like press releases or the like, be careful in how you extend your resources and don't over extend your resources.

If you're going to develop a voluntary disclosure program, develop one that's commensurate with what your resources are. I mean we work with issuers who are small infrequent issuers who have half-time finance staff, to those who have a designated person whose full-time job is to do nothing but monitor continuing disclosure and press release disclosure to the market just as if they were a corporate issuer.

So there's quite a spectrum out there.

Ms. Haines  – Bob Foran, what have you seen with the smaller issuers in continuing disclosure?

Mr. Foran  – I really don't have that much experience with smaller issuers just because of the nature of our practice at the firm.

But it is a burden. What I hear through trade groups that I'm associated with where there are small issuers, it is just a question of the burden. So what Drew is saying in terms of don't commit yourself to deliver something that you know you can't deliver in an appropriate manner, I think is right.

I think that the marketplace, investors in the marketplace, if they're going to be buying small issues, they need to understand that they are probably not going to get the same type of information flow that they will get by buying a security from a major large frequent issuer of debt. And whether that has been reflected in the price that the issuer gets when they sell their securities, I think it probably is, and that is a trade off.

But you can't expect someone to deliver the same type of ongoing information that is expected from a large issuer. You can, I believe, expect the same level of disclosure on the primary offering. And that is something I feel very, very strongly. If you want to borrow money in the public market, you have an obligation to delivery a quality document to the potential investors that lays everything out.

I really don't buy the fact that we can't hire lawyers who can deliver the right type of product for us because we're a small issuer and we're just borrowing a little bit of money. No, if you're borrowing in the public market, you have an obligation to have exactly the same standards being met in your disclosure, whether you're a small borrower or a big borrower.

And if that costs you a lot of money, well, maybe that drives you to borrowing in the private market. But I really do think that the primary market is where the standard is exactly the same. The secondary market, the investor should understand you're buying something perhaps with low liquidity. That should affect the price. And they cannot deliver the same type of ongoing investor relation service that maybe a large issuer can.

Mr. Costas  – Can I make a couple of comments on that?

Yeah, I agree. I'm never going to expect from some million-dollar issuers, the same kind of disclosure I get from New York City, which I can keep out of my office. There are extremes. And we understand that. And so for those guys, you know, we kind of usually just take the minimum requirements of 15C2-12, especially their essential services, water and sewer or electric utilities.

Water and sewer -- you remind me of an event under 15C2-12, when I was actually -- when I was doing more research as a water and sewer analyst, I was calling around to the small issuer down in Alabama and I was having a tough time getting them to return my calls and give me information. And when I finally got them to give me information in the last year's audits, which usually will include everything about rate increase and whatnot. I said, "Well, I can have last year's figures?" "Well, those are unavailable." "Unavailable?" "Well, didn't you hear? They got destroyed in the fire?" I went, "The fire?"

After two heart attacks and a hernia, I'm thinking, you know, this is why we need something like 15C2-12. Is that the minimum thing, this guy didn't think it was important enough because they were insured. Everything was rebuilt, and so they didn't really miss any debt payments, and in his view, there was no need to tell me that there was a fire that destroyed the water plant. "My Lord."

So it's a matter of education for the small issue. And I just recently, less than a month ago, was traveling and I went down to Mississippi, because, again, I had something there who was somewhat reluctant to give information, they're not comfortable. And when I got there, they're looking at me like I had just stepped out of a UFO. "Oh, we've heard of bondholders. We've never seen one before." They're like poking at you, and I said, "What are you looking at?"


But, you know, we always want to see the project that we own, which we're very happy with, and ask some questions that I think he was surprised about how general they were, to get a feeling of their strategy and so on going forward, and their strengths and weaknesses and competition. And after spending all day, we're best buddies now.

You know, it is a matter of going to the field and getting in front of investors and investors in front of issuers. And letting them know what our expectations are. You find that most people -- I found that most people in this business are very reasonable and are willing to help you. You just have to help them come along and give them some assurances, you know, they're not going to lose their hand for giving you some kind of information. They might be worried about giving it.

Mr. Weinstein  – Well, I think that's what important, about not losing your hand. There's a difference between the message and the messenger. What the federal securities laws focus on, of course, is the message and not to wave the banner unnecessarily here but picking up some of the conversation in the last couple minutes, there is, of course, a set of minimum requirements for continuing disclosure, and that applies to all issuers, unless they fit one of the "excepted" categories.

So I think if we could focus on what we do, what our clients do, what the community does, beyond the minimum that's required by 15C2-12, I think that's a very helpful forward-looking exercise.

I appreciate your story, Bob, about the fire. Fires can be actual. They can also apocryphal. And I encourage everybody who doesn't everyday pick up SEC enforcement actions as morning reading material to look at what the Commission has done in the last 12 or 18 months in the area of enforcement, because of those fact situations are very much more informative than we could ever be in front of the room. And the job of continuing disclosure, the precepts that underlie the particularities of 15C2-12 can really be seen in operation.

I would like to go back to this topic of best practices. And repeated references have been made to the NABL paper, the bondholders paper, that was put out in September. There are also specific industry guidelines from NFMA, the Financial Managers Association. GFOA has guidelines.

How do you guys, meaning the professionals who make the market work -- it's a big market -- and it's big everyday. How do you guys deal with best practices? Do you weigh a disclosure document, the guide, a discussion, with the NABL document or the GFOA document, the NFMA document, at your elbow? And if you don't, how do you use it, or how might you use it, or what can be done to bring practice more into the realm of the electronic age?

As everybody has said, we have a separate hem on that, and we're going to try -- we do recognize, however, the continuity of some of these concepts, but we're going to try to stay away from the specifics of electronics. But what do we do to bring things more in line with the technology -- to bring practices more in line with the technology that is more and more at our disposal and the expectation of the individuals who are becoming quickly a majority in the marketplace?

Bob, do you want to start it off?

Mr. Foran  – I have to say that when I raised the issue of best practices and papers that are out there with various people in our department, the response I got was what I expected.

The people in the health care area were very familiar with the paper out from NFMA on best practices. It's a hot area.

I would venture to say that the firms that are out there that do land-based deals are very familiar with the papers that are out there. It's current. It's something that people are looking at.

Frankly, I don't pay a lot of attention to them because the type of clients that I cover, which are more the general infrastructure, large issuers, I am more concerned about knowing the specifics of that issue and not having a checklist that people in my department would go through to say, "Well, we've covered that, we've covered that, we've covered that."

My feel is that my bankers who work for me do not fully understand the credit, they're not going to be able to lay the document out in a way that represents all of the material factors that an investor should be able to use to evaluate the credit.

So in a sense, that's kind of a difference in how people might use papers that are out there. I just believe that we have to look at the issuers that I cover, on a fact and circumstance, case-by-case basis.

I do like the ability though to be able to use the electronic media that's out there, and start incorporating more information by reference. And I am a big proponent of that. Some who want to carry a full document in their briefcase and go home and read it on the train or do something like that, may object to being required to go back to a difference source to bring information in.

But what I think is really important is that we have an offering document out there. If people are not intimidated by its size and will actually perhaps take the time to read the document. Institutional investors have research departments and analysts who will go through and read everything.

The individual investor, which we've heard before, will certainly most likely not read it, is not certainly not going to read a document that encompasses a lot of very, thick weighty documents that frankly I don't think they need to go through for their investment decision.

What I think we ought to really do is spend a lot more time in our intellectual capital to take these weighty documents and put a really good summary right in the front of it. And that I would say is one of the kind of horses that I would like to continue to ride.

My firm's practice is not a retail practice per se, but I think it makes so much sense to take the extra time to try to condense this big document down into a three-page summary. Because if we as professionals can't come up with something that summarizes the document, right in the front of the document, that lays the credit out, we're never going to get anybody to read it. And frankly, if we know they're not going to read it, I think we're asking for trouble ourselves.

And so I would just encourage -- let's take the ability to electronically incorporate by reference -- electronically available information, incorporated by reference, get the document down to a manageable size, and as professionals try to come up with a summary. It's not complete and it'll have all the caveats, you know, all around it, and it will refer to other sections of the document, but something that an investor can look at and understand the credit that's available.

The objections that we've gotten is it's hard to do. That really has been the primary objection. The secondary objection is it's not going to be completely accurate. But you know what? It is a summary. And so it's not going to be complete but it sure is something that somebody can look at. And I'd rather take comfort that somebody could read a three-page document and understand the credit they're buying, than to give them a 200-page document that I know they're not going to crack open. And then I'm going to say, "Oh, yes, they're fully informed and they understood the credit they were buying."

Mr. Weinstein  – Andrew, if you're bond counsel sitting at Bob's side doing a deal, where do you take that conversation?

Mr. Kintzinger  – Well, a couple of comments.

And to start with your leading question, Steve, about moving towards electronic and how do we deal with the body of voluntary disclosure guidelines that are out there. The GFOA guidelines. The disclosure roles of council publication that the ABA and NABL adjoined together on. The NFMA, primary and secondary market disclosure forms and their continuing disclosure forms.

All of these voluntary compliance-type efforts underscore something that's very important as we head into electronic. They tell issuers and help issuers and counsel along with the underlying legal premises of, okay, how do you build an Official Statement? How do you come up with an appropriate primary offering document and how do you disseminate it, and, in some way, how do you update that for secondary market purposes?

Those same underlying practices and principles are applicable to electronic disclosure; hence, the recommendation from NABL and the lawyer community that when it comes to electronic disclosure, well, sir, there are differences. The legal treatment should be no different than the paper disclosure document. Because those principles of what is an Official Statement, how does an issuer rely on third parties, how does it use third-party information, how does it pull that together into an offering document? All of those principles are the same paper or electronic, avoid staleness. Have current information. Be careful with their disclaimers about what you've relied on or what is your own.

All of those principles, paper or electronic, are shared.

Ms. Haines  – 10b-5 doesn't change based on your media figures?

Mr. Kintzinger  – Absolutely. Absolute. And I think that that's why it is a mantra right now. But electronic should be treated no different from paper in those significant legal ways.

In response to Bob's concern. I do think that, at least I in working groups, am seeing more of a trend toward summary statements. There will always be the concern that somehow in applying plain-English principles or in applying summary statements, that one way or another, while the attempt is to inform rather than confuse the investor with that information, something is going to be missed. That there will at some point be, you know, that a plaintiff's claimant suggests that, "Well, this is important and it wasn't in the summary statement." I think that tension is a healthy tension. I think summary statements we will see more of.

Ms. Haines  – This kind of leads into question about the plain-English initiative in the corporate area.

I've heard discussions with individual investors and with institutional investors who had very different perspectives on the usefulness of plain English.

And I wonder, Rafael, if you could give us your perspective first.

Mr. Costas  – Plain Spanish would be great for me. We have no problems with that. Obviously it would make it easier for the individual investors, but institutional investors are so used now to the gibberish that we had on these things.

Actually we know our way around Official Statements, and I think that would have little value added for the institutional investor versus the individual investor, who would be totally put out by an Official Statement. And I don't know many individual investors who would read one cover to cover and then know what they just read.

So I would welcome the move to help the market, but it is not something that I think that we are insisting on at the institutional level.

And I'm not sure Jean Kennedy has anything. Nod your head or shake your head on that.

Ms. Kennedy  –  – I agree with you.

Mr. Costas  – She's the NFMA chair.

Ms. Haines  – Wait, I've heard some other institutional investors say basically they don't want plain English because they know where they can find the stuff now and they know what those awful sentences actually mean.

Mr. Costas  – Well, Jean is good too --

Ms. Haines  – Okay. A little more flexible.

Mr. Costas  – Yeah. I think, you know, the other participants in the market have been asked to put up with a lot of change, and I think if this happened, I think the market would adjust.

Mr. Weinstein  – Additional observation on that? Denny, from the issuers perspective or Mark for the trustee?

Mr. Drake  – Well, we look at the disclosure document as having a variety of legal requirements for accuracy and so on but it's also a marketing document as well. And plain English I'd be neutral on. It's market driven. You know, will meet the regulatory requirements, plain English or gibberish, you know. Maybe with more difficult with gibberish -- with plain English rather.

But if the market indicates and the buyers indicate that's what is preferred and if a summary statement in front becomes the mode, we'll fall in line. I think we can accommodate either, so it really don't make to me much difference.

Mr. Brown  – I think from the trustee's perspective, we look at it maybe a little bit differently.

Our government document is the indenture. And we basically follow the indenture to the T. And so we like to have things spelled out in great detail as to what our role is, what actions we should or should not take.

So while conceptually I think I agree with the common language, I think from a trustee's perspective, we would rather have a need to have very definitive direction in carrying out our responsibility.

Mr. Drake  – You know, my comments are directed probably more towards the Official Statement. Yeah, making plain English out of -- you know, my normal joke is that if you can find a bond lawyer's statement less than about 60 words in any of these documents, then, you know, you get a prize for the day, because I never can.

But thinking about converting all of those documents into plain English, or plain language standards, would be a huge change. And I'm interpreting the plain English scope to be the Official Statement as opposed to bond indentures, you know, bond purchase agreement, all the rest of the legal documents that flow from that.

If it's intended to be broader, I'd be more hesitant in terms of comments about willingness and ability to comply because that would be a -- you know, that would be a big change I think.

Mr. Kintzinger  – And I think this is going to be the next leap or the next wave in this process, both Official Statement and indenture, should an issuer decide that it wants to undertake a voluntary disclosure or market communication program with the secondary market beyond Rule 15C2-12.

Where is that implemented? Is it in provisions in the indenture, where that program is laid out? How will it be described in the Official Statement in a manner that's commensurate with what the issuer intends to do with a voluntary program?

I think the implementation phase following the NABL position paper will be very interesting. And we'll need to again give this some learning curve time. As issuers become more sophisticated about development programs for voluntary disclosure, how will they be implemented in the documents?

Mr. Costas  – And one thing on too much legal language. I don't object to legal language. It is a legal business. But also too much legal language, it does raise in me a skepticism that these guys are trying to hide something.

So it does take -- when you start to see too many long sentences in one paragraph or one page about a rate covenant, you know, it shouldn't take that long.

And so I think that's one thing that I do share with other institutional investors is if you want to indemnify yourself of liability for this, then say so. You don't have to write me two pages of language for me to figure that one out.

I think that is something that institutional investors have a problem with.

Mr. Donovan  – I just want to bring up to Rafael that my bond lawyers tell me that the investors demand those long sentences in the documents. They would make it much shorter.

No, you know, I think the plain English on the Official Statement, some of the documents, the summaries that are included in the Official Statements -- I mean try to get it as simple as possible, but they're so complex, you know, a little confusing. But I think also other sections of the Official Statement can give possibly the individual investor because they're written in a straightforward English, describing the project, the source of repayment, the security for the bond, I think those are areas that we can keep and simplify so that the individual investor -- and I think it addresses Bob's point -- can look at the front part of the OS and get a sense of exactly what they're buying in terms of a municipal bond.

Pause some people are out there, they see these are governmental bonds. And that's all they need to know. They're tax-exempt. They're governmental bonds.

I mean I get calls from people who have bought bonds 25 years ago. They want to know what happened to it. And I have to tell them it was refunded in 1990. So their money hasn't been earning any interest since then.

So it's that sort of thing, you know, that for the individual investor I think we need to keep the jargon down. But give them a good summary where they might look at the first few pages and get a good sense of what the project is.

Ms. Haines  – You know, I recently received a prospectus from a mutual fund, in plain English. It's very easy to read. It was incredibly short. That's a really very simple security compared to what we do in the municipal area I think. And which really leads to our longer documents, although probably not our longer sentences.

What are your thoughts on trying to simplify these documents? Are we going overboard? Are they really that complex?

Mr. Weinstein  – Martha has put exactly the right question to this group as we all address that, really covers some additional focus here by taking the pressure off those of us at the table and even this industry and even the field of securities in general.

There is a very popular non-fiction book at your local bookstore, which shall remain nameless, by a very well-known author, who shall remain nameless. And it has nothing to do with securities, municipal or otherwise. And it has on a page number I will keep to myself, a sentence that goes on for more than two printed pages. It is part of a paragraph that goes on for more than five printed pages.

So in a sense, we're living in a time of a super technological everything, and jargon is a byword. There is, and it's illustrative because we're not talking about anything in the securities business, there is a point at which precision becomes non-communication. And it's something we ought to all keep in mind in all of our personal endeavors as well as our professional lives.

So with that as a kind of a reliever of pressure here, what do you think about Mark's question? Who wants to go first?

Mr. Kintzinger  – Well, I will respond first by offering the anecdotal experience of the public finance partner used to doing municipal bond deal after deal after deal, who lends himself or herself out to the corporate securities area to help out with a deal and they go through a corporate debt transaction with a short sheaf of documents and a routine set of definitions and they say, "From a document point of view, this was so simple. This was so straightforward. This was so easy to implement, and it's the world of Regulation SK, and straightforward disclosure."

The fact is that the tax-exempt instrument and security is a complicated instrument in security. It is a device that is governed by very complicated and arcane provisions of the tax code and a working group in putting together an offer of securities is not just dealing with disclosure about the credit that repay that security. It's also involving and engaging tax lawyers in an analysis of the prospects for that instrument bearing interest that is exempt from federal income taxation, tremendous complex, risky at times, but what is fair to say is that a straightforward tax exempt instrument, if the several regulations and rules are not satisfied, is subject to draconian remedies. I mean loss of tax exempt of the interest.

Hence that leads to more complicated disclosure. And in working group after working group, you see them struggling with "We need to simplify and describe the credit but somehow we also need to account for all the rules and regulations on the tax side."

So that somehow defies satisfying plain English at all times.

Mr. Drake  – I will contribute and agree with what Andrew said.

There's a -- similar to common law -- there's a known custom and practice in these working groups that no one understand these documents. And modifying slightly a document has a ripple effect to several other documents typically. And when I think about issuance costs of converting that legend of documents and 60 files in a closing table laid out, you know, of all the documents that need to be signed, into plain English, that would be a really significant project to do and then you would have to renegotiate I think all of the history that has led these documents to where they are and how they read today. Because it's not by accident that they are what they are.

And so I would be reluctant to want to convert all of the transaction documents into plain English. However, their description and depiction in the marketing document and the disclosing documents in the OS I think can be effected and simplified.

So that would be my contribution.

Mr. Donovan  – And just to follow up on that.

I think, you know, there are a lot of technical and legal issues when the documents are developed. However, there are things, I mean just going through the definition section of some of the loan and trust agreements and such. I mean three and a half paragraphs on describing what the revenue is to pay back a bond. I mean I think there are areas that we can maybe simplify with just a little plain English, so someone like Helen can understand that, you know, the money that's paying back these bonds only comes in Thursday after 2:00 on a month with an R in it.

I mean those are the types of areas that we need to simplify. And I think it's just better because I agree, there's a lot of technical aspects to it that just need to be addressed and don't lend themselves to simplified language unless Congress is going to pass legislation with simplified language.

So I think that's where we are. But I think there are areas that we can look at trying to simplify it, and, you know, address these for the individual investor.

Mr. Fredrickson  – If I could ask an industry question.

And let me re-emphasize the disclaimer that I'm speaking that I'm speaking for myself and not for the Commission. But what are OS's for? To what extent are they litigation documents and to what extent are they marketing documents? And I assume that it's, you know, a broad range of answers as to who're the purchasers and depending on the issuers. But to what extent are individual investors reading these things before they are making an investment decision, and to what extent should that drive the debate as to how much we change these documents?

Mr. Costas  – Well, I can tell you from our perspective. I mean can see a plain language statement, but we, as the institutional buyers, are going to ask you for all the other documents that come with it. We would have to take a look at the indenture because for us it is important to know ahead of time where the flow of funds are, what your remedies in the default, what happens if you violate the reg covenant, trustee duties and how they'd defined, how we get affected if you start filing for bankruptcy. Do they withhold money from the reserve fund, which was a surprise to me. But, you know, it probably is in there though.

And so that's the kind of thing that we need to know as a fiduciary to our shareholders, and because we're more likely to own -- well, we do own a lot more than any other individual would own. We own something like eight or nine thousand bonds in our shop alone, so odds are that even with point one default rate, that you're going to have a couple of situations in your portfolio that merit an investigation to the legal language. And we do a lot of our own legal work as analysts and then defer to our own corporate attorneys. But it does become an issue and we can't just say to our shareholders, "Well, we looked at the two-pager and there was nothing there about that stuff."

That's just not going to fly. It's not going to hold in a court of law. In a court of law, we have to prove that we did read the Official Statement cover to cover and that we did read the indentures and all the supplements we should have read, so that we have a case. Because if we don't, a judge is going to throw us out of court. He's going to say, "It's on there. You didn't see it."

Does the retail investor go to into that detail? I'm sure they don't. But do they also own that many defaulted securities, and when they do, do they rely on people like us to take the lead at the institutional level on the work-out, which has been our experience. On a bunch of these issues that we've had to work out, there is maybe a couple of retail people, there might be even 100, but we own 65 percent of the issue and somebody else owns another 25. So tend to be the ones working it out. And the retail person is happy with the work-out. They couldn't have done any better themselves.

So that's one of the issues that we need to be proud of in this kind of discussion.

Mr. Brown  – And that's a good point. You brought up the issue of the debt service reserve funds and that's been in the paper recently.

And, you know, without talking about any specific issue, we do have situations where what's in the OS is different than what's in the indenture. And so that situation, and it kind of goes back to what you said, Denny, that it ties to other documents, or doesn't tie to other documents necessarily, or specifically. But it is important. And I can just tell you that on the default situations and the work-outs that I've been involved in with retail holders, most of the conversations I have with them indicate that they really don't review the prospectus at a very deep level.

Ms. Haines  – I think in the documents as well, there can be a certain tension among the participants on the working team between the sort of wanting it to be in more plain English and dredging through these horrible things. I know every bond lawyer I know has a story like this. But there were times when I did not, in private practice, when I was concerned that no one was reading these documents that I was killing myself to make as perfect as possible. And so I would draw the Shakespearian sonnet.

Who has some sort of boilerplate provision? And the trick usually was remembering to take it out before we closed.


I mean the tension I think is not just in the Official Statement. They can be dreadful to deal with prior to the litigation or the default.

Mr. Weinstein  – We all have stories. To pick up on this theme, and I was nowhere near as poetic. I was looking for somebody on the team to insert what I call the obligatory typographical error to see whether anybody read a critical section of one of these documents. And like our speaker this morning, never got a phone call on things I should have gotten a phone call on.

Again, we can't perceive messages for investors. We can only send them and comply with the federal securities laws in doing that.

There is this tension that Martha referred to us. All of us in the Office Municipal Securities have had other lives and worked in the marketplace. And in one of those earlier lives, I was engaged in translating a document from its preexisting form into what -- the term wasn't around but what we call today "plain English." And I think it was a fairly successful attempt.

But somewhere in one of these drafting sessions, about 2:00 or 3:00 in the morning, an argument developed among counsel from competing firms as to whether the proper phrase was "A year" or "per annum." And I did not believe that that advanced the cause of plain English. And I think we all ought to remember little stories like that, not only talk about these very big important complex precise topics.

Mr. Foran  – Yeah. I was just going to say. To me you're never going to be able to take a document and put the entire document into plain English, because I'm afraid it just won't be accurate.

I view this document to be a liability document. This is something that I want to point to, and I want to say it's exactly the way the indenture reads. It's exactly the way that the statute reads. Everything is there. However, that doesn't mean that we can't have a document that has layers.

I'll give you a great example, I think. We've been getting rating reports from a variety of rating services for a long time. Some of those were helpful. Some were less helpful. One of the rating services, more of an upstart, if you will, in our business years ago came out with a document that had a highlight summarizing the credit. Then they had a section that went into more detail. And then they had a full-blown analysis in the bulk of the document.

The reader could read the document in its entirety and understand everything that was going on from the rating agency's perspective. Or they could read as much as they needed to, to become comfortable that it was something that they wanted.

So to me when I try to think about a document in the marketing standpoint, I just want to have something there that I feel conveys the essence of the credit so a reader can look at it. Certainly, you know, refers the reader to other sections of the document for more full discussion.

But I still want that document for protection to have everything exactly right, and I think you're going to be driven to staying with those legal -- you know, the legal language and the 60-word sentences and things like that. Because sometimes you just can't describe it any other way.

But, again, to think of the document in terms of, this is going to be the essence of the credit. Maybe we have more full discussion, and then we have a more detailed discussion. In a sense, we've sort of been doing that all along in that we have a summary of the indenture for those that are driven by indentures. We have a summary of the indenture in the back of the document. That gives us comfort that, yeah, when we summarized it up front, we may have not gotten precisely to the point, but we can refer back to the section where it is, you know, elaborating more fully.

So to me that's the concept we ought to be working toward. It's just something that lets readers read enough that they understand it and if they want to go further, they can go further. But at the same time, we're all protected because everything is in there.

Mr. Kintzinger  – Steve and Martha, I think the next generation on plain English is really going to be in the context of electronic disclosure, which we'll lead into this afternoon, but in response to the Commission's interpretive release on electronic disclosure, both the NABL subcommittee and the board in commenting on that offered that what's going to be important going forward in part are framing in plain English references to what comprises the preliminary Official Statement or the deemed final or the final plain English and fair disclaimers about what information is part of the offering document that has been relied on but has not been supplied by. In fact, there are even some offers in those comment letters of plain English-type language that may be suitable or worked for. Hyper-link text and the like.

But I do think the next generation of plain English discussion needs to be in forming some improved guidelines on electronic disclosure, so that issuers will have that available to them.

Ms. Haines  – And we're in a transitional phase right now. I mean in order for an underwriter to deliver information on the corporate area electronically, they need to get consent from the investor to whom they're supplying it that way. And the reason is it's less than half, the country apparently is on the Internet yet.

And so, Bob, you made a reference about incorporating by reference, which I think the incorporating by reference stuff that's on the Web site would be obvious way to go. But we're not quite there yet. It's going to be the issue of the decade I think as we deal with the new technology.

Mr. Weinstein  – I think a point that's been made here several times, but to make it explicit near the wrap-up of this session is that we are talking about practices and the requirements and enforcement actions that apply to all segments of the market. Two-thirds or three-quarters of all the new issuances out there are $1 million or less.

To pick up Paul's theme of this morning, 40 to 45 percent of holdings now are in the hands of individuals or individual trusts, and that number is growing more rapidly than any other segment of the market. And we ought to keep that in mind as well, that we are not addressing by law only institutional investors or primarily institutional investors, but in practice, the market is largely composed of individual holders. And I think as we talked about all these fundamental and important concepts, the continuing requirements of 15C2-12, the requirements of Rule 10b-5, the clarity and precision of communication without confusion, reaching investors, actually communicating to people, we really should all keep in mind, to a large extent, we are talking about relatively small issuances and we're talking about individual portfolios, individual investment decisions.

So that not everyone, by any means, is the sophisticated investor and the federal securities laws are not aimed at sophisticated investors, but investors all of a kind.

And I'd just like one additional observation from Helen Gee, as we close out the session.

Are you looking for something out there that isn't happening in the marketplace?

Ms. Gee  – I can't tell you whether I am or not at the moment because from my own personal standpoint, this issue has not arisen until I was exposed to this whole consideration. And now I am -- I'm very much interested in the nature of the concerns expressed by various people around the table. And I find myself saying the important issue for us is that we play on an open playing field, that we get a fair amount of exposure to the information that is important in making an investment decision. And that that information be available not only to the highly sophisticated investor, but also to the very simple individual who makes important decisions from his standpoint about what kind of investments he's going to make.

What constitutes a fair playing field for the individual investor? I think that's where we need to be focused, and I see more and more concern about that on the part of out participants. So I'm kind of pleased to see the way things are going.

Mr. Weinstein  – Thank you very much.

I'd just like to say, take 20 seconds out here. We are all here engaging in this discussion. This roundtable is happening for the second year in a row. The last half decade of enlightenment of the Commission's enforcement with its customary light hand in the municipal securities area is really is due to two people. Arthur Levitt, our chairman, and Paul Maco, the director and founder of this office.

And, Paul, we wish you well.


Ms. Haines  – I'd like to change gears for a second and just bring up the next issue that I think we're all going to be dealing with, at least in the traditional governmental area. There's new accounting rules coming out, FASB 34, which may make it difficult to compare prior year's results, financial results, to current.

Does anybody have a comment on that?

Come on. I know you do.

Mr. Foran  – Well, there is a concern that I have, and it is partly based on not having full information as to the implications of this pronouncement or this new standard.

But we have issuers that are out there that have made commitments to provide ongoing disclosure of certain information. And that information is derived from audited financial statements prepared in a certain manner. And if that information is no longer going to be prepared because the auditors are saying we cannot deliver an audited financial statement in this manner because, you know, our professional principles will not allow us to do it, where are we? The second issue for me as an underwriter. I am concerned that I will not be able to get the kind of information I need for my due diligence if that information isn't derived through an audited financial statement that I can easily trace back to. So for me it's an issue.

There are other issues that are out there with regard to will we continue to have consolidating financial statements or will we have consolidated financial statements for a governmental entity that has many different enterprises or many different functions that are now being brought together.

We are all familiar with issuers that are out there that sell bonds underneath the airports, sell the bonds underneath this agency or sell bonds underneath this, you know, fund. What happens to the existing bonds that are out there when we do go to either a consolidating, you know, where everything is still there and we end up with eliminations, so we can track information back, or will it have to be more of a consolidated.

So, you know, if you've got greater knowledge and information, I'd love to talk with you to learn more, but these are issues that I think we have to address. And they're coming up with some of the deals, transactions, that we're working on now because even my clients can't tell me where their auditors are going to come out.

So I think it is an issue that can have implications for primary disclosure responsibilities and ongoing disclosure responsibilities for preexisting transactions.

Ms. Haines  – It sounds to me like this is a good subject for next year's panel. And we should maybe defer it until then.

We're out of time now, and we'd like to thank you for coming. We're going to take a lunch break and we'll resume at 1:30, 1:15? 1:30.

(Whereupon, a luncheon recess was taken.)

On to Panel 2...


Modified: 03/21/2001