Panel I: Bringing Bonds to Market – Issues Arising in Primary Offerings
1999 Municipal Market Roundtable
United States Securities and Exchange Commission
Moderator McNally: Good morning. Welcome to today's first panel. My name is John McNally and this is primary offering disclosure.
As indicated by Chairman Levitt, we do have representatives from every industry group - we have issuers, the SEC staff, financial advisors, underwriters on each panel. And we're going to try to take advantage of that because we're not going to be instructing. I'm not going to be speaking as I normally do on SEC enforcement actions. Rather, it's really a dialogue to just see how the market is working today, to see where there may be some areas for improvement, and just to go from there.
The structure we've outlined is we're going to begin with how official statements are prepared and who has the responsibility for the preparation and also for the document itself.
We will then consider how the market has responded to the SEC's 1994 interpretive release, and that was the release, if you recall, in which the SEC said there are six areas where improvement is needed. And we will go through each one of those areas and just see where the market is.
At the risk of sounding like an SEC staff member I have been asked by my partners to advise I am speaking today on my own behalf and not on the behalf of either Hawkins or of the National Association of Bond Lawyers. As Paul indicated, there will be questions from the floor that can be taken. And we'll pick the cards up. Then as the moderator I will filter the questions and ask the ones that are appropriate.
Let's begin with the official statement disclosure. And if I can ask the panelists who today is actually preparing the drafts? Who puts these documents together? What's been the experience of the panelists?
Either Billy or Barry if we can start?
Mr. Smitherman: You know, I think the answer to this, John, is a resounding it depends on the type of transaction and the complexity and whether it's a negotiated transaction or a competitive transaction. And I think we'll speak to this over and over today. Obviously it's the issuer's document but there are a lot of cooks in the kitchen that normally add their expertise and insight into the preparation of an official statement.
In a negotiated transaction you would expect the underwriters and underwriter's counsel to be more intimately involved. In a competitive transaction you would expect the financial advisor to be more intimately involved. And I think the issuer's involvement is probably about the same in both types of deals.
Mr. Cobbs: I agree. With the one exception that I think it is the issuer's document that we all have a responsibility, all have liability if it's incomplete or false disclosure. Although in a negotiated transaction underwriter's counsel will have primary responsibility. And usually a lot of folks sitting around the table give their input. And I think it's everybody's liability. In the competitive transaction I think bond counsel would probably take the lead working with the issuer and the with the financial advisor's input. But, again, as I say, it's a collective undertaking and everybody is responsibility although probably the issuer has got the primary responsibility as far as the OS as being the issuer's document.
Moderator McNally: How often as financial advisor on a competitive deal would you actually do the preparation or would there be counsel that would prepare it?
Mr. Cobbs: One time I wrote Princeton University's first official statement, having gone to Princeton and it was a real challenge to write my alma mater's first OS from start to finish. I think that's the only time – rewrote New Hampshire's OS back in the early '80s but they had a trouble. They'd fall from AAA to A and they were really in a mess.
But by and large if it's a first time issue like something like Los Angeles Wastewater or San Diego Water or ECA, all those – well, not all those, Los Angeles' was competitive but bond counsel took the lead on that and financial advisor and the issuer. So you sit around a table and everybody makes comments.
Moderator McNally: Are you seeing more use of disclosure counsel since the –
Mr. Cobbs: I'm sorry?
Moderator McNally: Are you seeing more use of disclosure counsel since the –
Mr. Cobbs: Probably less. I would say probably less since the first, you know, New York City, since they pulled back from their fiscal crisis, although they have disclosure counsel still on GO they don't have it on the transitional finance authority which is securitization of the income tax receipts. And we don't see a lot of disclosure counsel. It's used sometimes but, frankly, I kind of find it's used to try to find a place for it, more than it is, it's necessary. Because things are so good right now that it's probably not those kind of exposure issues. Probably we see it less and less.
Mr. Smitherman: John, I would add that it depends upon the markets as well. You find some financial advisory firms that do a large volume with a number of very small issuers. And I think in those instances you would find that the staff of the financial advisors would be heavily involved in drafting the offering document obviously in conjunction with the issuer. And the first time that a lawyer may see the document is when it's almost ready to be printed. And that's a function of the fact that they're doing 500 deals a year.
Moderator McNally: This is a competitive situation?
Mr. Smitherman: Primarily in a competitive situation.
Moderator McNally: And in that instance where you seeing it just at the last minute I mean just what do you do as far as your responsibilities to look at the documents? I mean just what is the level of review?
Mr. Smitherman: Well, in a competitive transaction I think the level of review would be the same regardless of whether the document had been drafted by lawyers or by the financial advisor.
In a negotiated transaction we try to get in as quickly as possible and have a due diligence session with the issuer. We would, you know, normally get our underwriter's counsel in and meet with the issuer and try to get as much information as we could, not interrupting the proposed timetable for the financing. But it can be challenging.
Moderator McNally: And who are you seeing providing the opinions as far as the disclosure? Is that coming normally from underwriter's counsel or is that coming from bond counsel? Who speaks to the OS?
Mr. Cobbs: It's the issuer that – the 10(b)(5) certificate. And frequently bond counsel does to. And in negotiating sometimes I guess underwriter's counsel does – I'm sorry. Sometimes underwriter – The issuer is primarily responsible for a 10(b)(5) certificate.
Moderator McNally: Yeah, but I'm speaking about whether or not I mean who provides the various opinions as far as the nature of the disclosure? Does that depend on who's drafting? Does it depend on whether it's competitive or negotiated?
Mr. Smitherman: Well, in a negotiated deal we'll get an opinion from underwriter's counsel. I try to always get certificates from everyone who came close to the deal. Anyone who was responsible for any section of the offering document I'd like for them to give me a certificate attesting to the accuracy of the information. I don't always get it but I try to get it.
Moderator McNally: Let me ask more broadly, has there been any change over the last four to five years as far as who's preparing it, who provides the certificates, who provides the opinions? In light of the enforcement cases, in light of the various continuing and primary disclosure, or at least as far as who prepares it and who provides the opinions and the certificates has that pretty much stayed the same during the last few years? Has there been any evolution?
Mr. Smitherman: I'd like to hear Ben's answer.
Moderator McNally: Ben?
Mr. Watkins: I think it's really stayed the same. And it's really the practical reality of producing the documents. And you've got the disparity between large and small issuers. And I think that drives to a great extent who's involved in the process and exactly who's responsible for the preparation of a document. With large, frequent issuers in our case in the state of Florida we've got the critical mass and the staff onboard necessary to do the preparation work in house. And there are a number of people here, Frank Hoadley and I'm sure Art Heilman in Wisconsin and Pennsylvania, so large frequent to a great extent are handling document preparation in house.
But when we move down the scale into sort of the middle markets and smaller issuers they don't have the technical expertise and the familiarity necessary to do a good job. And in those cases you see either the financial advisor or the underwriter to a great extent or underwriter's counsel taking the lead role in preparation of the document.
So I don't see that that has really changed. I think the awareness of whose responsibility it is has been affected by the release and made it very clear that the issuer is primarily, the issuer is responsible for the document from a securities law standpoint.
Moderator McNally: So to summarize, there's been really no change as far as how it's prepared, who provides the opinions, who provides the certificate, but there has been a change in the perception as to whose document it is.
Let me speak to 15c2-12. Has there been any change in the way the document's prepared in light of 15c2-12 in the sense that does the obligated person concept influence how you structure the OS? Does the concept of what do you have to provide on a continuing basis, the financial information and operating data, does that alter or influence how you structure the OS? I mean just what is the interplay, if you will, between 15c2-12 and the preparation of the document initially?
Mr. Watkins: We are more, with the disclosure requirements we are more mindful of where we get the information, that how relevant the information is and how difficult it is to get. And if that information is not absolutely essential to the deal we will strip it out, especially if it's very difficult to obtain. Overlapping debt tables, competitive rates on multi-family housing units within a particular jurisdiction, things like that are not – while they're informative they're not necessarily critical to the credit. And when that information is very difficult to obtain we'll leave it out.
But we're not consciously going through and saying, oh, we've got to update this so let's leave it out. But I do think that there has been advice from the legal community to minimize disclosure as a result of in order to try to minimize the chance of their being any misstatement, to minimize and only say the things that you need to because of the ongoing obligation to update the information.
Moderator McNally: Chris, what's been your experience as far as an investor, are you seeing a change in the disclosure since 15c2-12? And I'm speaking peculiarly to the primary offering document.
Mr. Ryon: We've seen it get better, take a leap forward, and now has become more difficult and more difficult to get good information and varied information in terms of disclosure in the primary documents. For example, assessment rates are one area where tax assessments have not been forthcoming. They've been lagged. And they've been available in other public sources.
So we have seen a, we have seen, as Ben said, the disclosures start to be – fall back a little bit.
Moderator McNally: When you say fall back you're saying that you're getting less now than you did prior to the 15c2-12?
Mr. Ryon: We had a first, we had a good step forward where we had good disclosure because of the rule. But now we're starting to see issuers kind of move back a bit as to what they're disclosing. They want to make it the smaller amount because they realize they have to continually disclose. And getting information that's not in the official statement is becoming more and more difficult for us.
Moderator McNally: I mean to ask the obvious questions I guess, I mean from your perspective is all the information that's material to your investment decision in the OS? Or are you having to get other information from other sources you think is material before you would invest?
Mr. Ryon: Sometimes the information that's in the OS will bring up other questions. And then we have to ask for other information to answer these questions. And we continue to request that.
It will, it will color our overall opinion of the credit at times.
Mr. Smitherman: Chris, when you're looking for this additional information what's the procedure that you take, do you call the issuer up directly? Do you call the financial advisor?
Mr. Ryon: Typically we'll go to the issuer or the underwriter and we'll request the information. And many times we're told that, you know, they feel that they can't provide that to us because they'd have to provide it to everyone in the market.
Ms. Starr: Are these generally retail or institutional deals or does it make a difference?
Mr. Ryon: Pretty much primary deals, institutional deals that we will see. Larger ones.
Mr. Smitherman: Well, all I can say is you must not be calling Banc One. We're more than happy to give you all the information.
Mr. Watkins: Different issuers have different takes on that. There's some reluctance on the part of some issuers to give information to certain people, to answer inquiries of investors. But I can tell you from the state of Florida's standpoint we welcome any inquiries and we will address those inquiries on a one-on-one basis.
If we feel that an investor has raised an issue that has general application or general interest to the market we will make – we will write it up in a form and disseminate it to everyone. And that's a web page is extremely helpful because you get instant dissemination to the entire market. So from a best practice standpoint I think that's the way to go.
The other thing is in a lot of cases we will try to correct misinformation in the market, issues that had been misreported by the press. And those are the things that generate more discussion than the individual inquiries from investors. And so it again provides an opportunity to sort of set the record straight. And our philosophy may not be pervasive in the issuer community but, hopefully, that will evolve over time
Moderator McNally: There is going to be a secondary disclosure panel which will get into the obvious issues as to whether – how the issuer responds to the inquiries that come in, in the marketplace, whether there's insider trading concerns, etc. But I'm trying to focus peculiarly on the primary offering.
And were you speaking to when you're out there with the POS and OS you're getting these inquiries?
Mr. Watkins: We typically don't get any inquiries while we have POS on the street. I mean it is very infrequent that we get inquiries from issuers. I'm surprised at how infrequently it does occur. Maybe one a week.
Mr. Ryon: The inquiry is going to be dependent upon what the credit is. You may need more information, say, for a hospital deal than you would for a state GO deal.
One of our analysts' pet peeves is that a lot of times you'll have the rating agencies get more information than we're getting. And we're told that we can't have it because, again, they'd have to make it available to everyone in the market.
Moderator McNally: Is this in the – I'm sorry – is this in the primary market? When the issue is out there on the street and they're trying to sell it?
Mr. Cobbs: Yes. Sometimes you get questions. New York City is the best example. We go around to investors and we get questions back. And what we do, New York City does, is we sit down at Munifax and it informs the entire community. And that addresses Chris' concern, and you don't have a risk of insider information.
Moderator McNally: And I think the real concern is you get these inquiries while you're out there. And even though you think you've done the best you can –
Mr. Cobbs: Yes.
Moderator McNally: – with the document some question comes up that indicates perhaps there is some material thing that should be out there in the marketplace.
Mr. Cobbs: Then you put it on the Munifax.
Moderator McNally: And the question is what do you do at that point?
Ms. Starr: Do you also then make it part of your OS?
Mr. Cobbs: Yeah, next time around or in the final OS. But you make it Munifax and that way Chris gets his information and there's no risk of insider information.
Ms. Starr: The one question I had was does the level of disclosure in the OS is it different if it's an institutional as compared to retail deal?
Mr. Cobbs: The official statement –
Mr Ryon: Some deals.
Chairman Levitt – You made that point earlier, you don't go out and just sell, hardly ever it's entirely retail. You have the same document for both. Chris doesn't get favored treatment. We'd all get busted for that.
Moderator McNally: Well, I think we've had a consensus that, at least among the non-issuers, that it's the issuer's document.
Moderator McNally: And this does go back to the SEC's, all the way back to the SEC's '89 release issuers are primarily responsible for the content of their disclosure documents and may be held liable under the federal securities laws for misleading disclosure.In light of it being the issuer's document and the underwriter nevertheless having their responsibilities to review and inquire, I'm questioning what people think of disclaimers, both generally and also the most recent BMA proposal on this? Let's start with the underwriters. I mean how do you view the disclaimers? Are they protective? What do you think you're accomplishing through the disclaimer?
Mr. Smitherman: I think what the disclaimers are designed for is just to somehow bring uniformity and a bright line to the issue of the standard of care that's required of underwriters in the disclosure process.I think the thing that the underwriting community, this is my belief and assumption, is that the standard or care is not one of scienter or negligence but in some cases one of strict liability, and that that is not a standard of care that we should be held to. Certainly not in all transactions. As I said at the beginning, there will be transactions where the issuer and the investor desire us to be intimately involved in making judgments about the accuracy and the adequacy of disclosure. But then there will be times when they won't desire it and we'll get an offering document, be expected to make a bid on it the next day. And in that case, you know, I can't see how we're supposed to be able to pass judgment on any part of that document.
Moderator McNally: And, therefore, what? And, therefore, you think the disclaimers are appropriate?
Mr. Smitherman: I think that the disclaimer that has been proposed – and I have a copy of it by the TBMA, and I was not involved in drafting it – I think it is an attempt to come up with some consensus on a disclaimer that does not rely upon the circumstances surrounding the transaction in a hindsight mechanism to determine three years down the road whether the underwriter's review was adequate or not.
Moderator McNally: Chris, I mean how do you – Do you have any concern with the disclaimers? What is your position as an investor on that?
Mr. Ryon: Again, it's hard to say for all cases. If you're looking at a state GO, well, you view the disclaimer one way. If you're looking at higher risk area, for example a lower rated healthcare deal, you'll view that disclaimer another way and it will color your opinion differently on whether you're going to buy the credit or not and what your confidence is in the underlying security.
Ms. Starr: Let me ask a question. Given the Commission's statement with respect to the responsibilities of underwriters and their obligations with respect to forming a reasonable basis are underwriters and others being advised that the disclaimers actually have an effect of limiting the liability of the underwriters with respect to the disclosure in their document and minimizing the responsibility?
Mr. Smitherman: I don't think it's nearly that uniform. I mean I have never seen any kind of directive either from my firm or from any of the associations that this is what you're supposed to use and that this will somehow lessen your responsibility.
Moderator McNally: It was a leading question.
Mr. Smitherman: Yeah, I know. I'm trying to respond to it in the best way I can.
Moderator McNally: You need counsel.
Mr. Smitherman: I think that there are a host of different methodologies for trying to approach the issue. And I think that TBMA is attempting to try to craft something that can be used uniformly by all underwriters and all transactions.
Yeah, it's, I mean it's an incredibly interesting issue. I have to tell you of a story of myself. When I joined Banc One we had a certificate that our compliance department wanted all the bankers to sign that basically had this language in it that we had reviewed the offering document and we were certifying to its accuracy. And I came in and said, well, I don't think we ought to sign that.
And she said, well, you know, this is what the Commission requires. And I said, well, it may require that the firm stand behind it but why does it have to be the individual banker? Why can't it be the underwriter or someone else in the department? And, as you can imagine, I didn't win that battle.
But I think that it's an issue that needs, it needs more conversation.
Ms. Starr: Let me ask just a question – and I'm sorry, John, to – From an investor's standpoint if you buy a deal that has a disclaimer in it do you – have you been advised or do you get any sense that you think that you may have waived any ability that you have to sue as a result of that disclaimer?
Moderator McNally: No.
Ms. Starr: And that, you know, that's one of the key questions is does the existence of the disclaimer in fact mislead investors into thinking that they have potentially waived any rights that they have to, to sue any of the participants in the transaction.
Moderator McNally: Yeah, and this goes back, and Amy pointed this out to me, this goes all the way back.
First of all, there was the more recent '94 release of the Commission where there was the footnote "disclaimers without further clarification are misleading." And it was referring to the fact that there are responsibilities of underwriters set forth in the '88 release. And to the extent they're simply a disclaimer that may be misleading.
But I think it's interesting that it says "without further clarification," implying that perhaps a well drafted disclaimer could work.
Amy was referring I think at least in part to the '51, 1951 release from the SEC, actually it was a opinion of the general counsel at that time. And in speaking to disclaimers there's some very interesting language about the question being whether or not the reason for the disclaimer is to create the impression that in any way there has been a waiver of any right of action against the underwriter. And that's why it's very interesting to determine just how the investors do perceive these disclaimers.
But, once again, similar to the '94 release it did go on to say, and this is speaking to a disclaimer which sounds very familiar, "a legend in common use stays in effect that the information is obtained from specified sources and is believed to be reliable but its accuracy is not guaranteed." It goes on to say, "it is my opinion that the mere use of this legend is not objectionable."
So there has been no SEC position to the effect that absolutely blanket disclaimers are wrong. However, to the extent they are intended to mislead as far as what your right of action is or what your responsibilities are as an underwriter, then it is objectionable.
Mr. Smitherman: Yeah, John, what I would like to see, and I don't know if we'll ever get there, is disclaimers and language that really reflects the nature of the agreement that the underwriters and the issuers have struck with regard to how much input the issuers actually want from the underwriters when it comes to crafting it. And, Chris, I'd like your comment on this.
And it seems to me that there are deals where you absolutely are looking for the underwriter to give you some comfort on the deal. And there are other deals where I mean you don't care.
Mr. Ryon: Again getting back to what sector is the credit in, what is the credit itself? If it's a well-known credit, if it's the state of Florida, we're pretty confident we understand what's going on in that area. If it's not, where if it's a negotiated deal where the underwriter is a key, is playing a key role in bringing that credit to market we're going to look to the underwriter first to have much more liability in something like that.
Ms. Starr: But I think the thing is you need to keep in mind is that you can't contract away your federal securities law responsibilities.
Mr. Cobbs: I think they should be almost a double, a dual standard, a double standard. I don't think you can – I'm not usually on the side of underwriters, I represent issuers and I fight with underwriters – but I think underwriters in competitive sales should not have the same level of liability as they do in a negotiated sale. They are not part of the process of developing the OS. And they get it you said the day before an issuer, and it's very, very difficult to be held to the same standard.
The one way I see to get around this is that you don't, with low rated transactions you can't sell them competitively. So you don't really run into this problem and you don't have much risk of having a blow-up. But I just don't see how you could rally ask an underwriter when he gets an OS on a competitive sale to have the same knowledge and the same level of liability after they sit around for weeks or months developing an OS.
Moderator McNally: Well, I mean I think in –
Mr. Cobbs: Don't think that's fair.
Moderator McNally: Yeah. Well, you appear to be directing that at Amy. And in her defense I don't think that is the SEC's position.
Mr. Cobbs: Okay.
Moderator McNally: There are different standards depending on whether it's competitive or negotiated. The '88 release as far as competitive at least it's a matter of reading it and asking questions if they're not apparent on its face and following up. There is considerably more required as far as a negotiated.
And along those lines at the risk of saying I wouldn't do this, as far as lecturing, the BMA disclaimer in my view has some problems with it. The way it reads is "In accordance with its responsibilities under the federal securities laws the underwriter has reviewed the information in this official statement but does not guarantee its accuracy or completeness."
And the premise that the BMA operated on, to quote from their release, "In drafting Section (b)(1) of the rule the Commission relied on a single word 'review' to signal the responsibilities of underwriters under the federal securities laws." And, just briefly, I think that's a misreading of the '88 release because when you read the '88 release it really speaks of review as being the starting point. And once you review it in a competitive situation you have to follow up. If you're reviewing a negotiated it's just one element of an overall due diligence inquiry.
And the mere fact that a procedural rule, if you will, which is 15c2-12(b)(1) which says you have to review prior to offering, does not mean that that in and of itself is sufficient. Nevertheless, I think you can draft a disclaimer, I think there's nothing prohibiting the disclaimer as we see it in the releases. And I think it is appropriate, as the BMA outlines, to try to set forth to the investor, if you will, the respective responsibilities of the issuer and the underwriter.
And in doing that, BMA had three standards it wanted to make sure were met. One, the official statement is the issuer's document, which we all agree. That the underwriter has reviewed the document, as required. And, that the underwriter does not guarantee its accuracy or completeness.
My proposal would be something to the following effect – and, Amy, I would like to see what you think of this, whether it works, maybe you can't comment – "The underwriter has reviewed the information in this official statement in accordance with and has otherwise satisfied its responsibilities under the federal securities laws but does not guarantee the accuracy or completeness of the official statement." It meets what I understand to be the BMA principles. It distinguishes the respective responsibilities but it avoids the implication that a mere review is sufficient.
Ms. Starr: Well, actually let me step back a minute because I, of course, forgot to give my disclaimer which is anything I say represents my views not those of the Commission or my colleagues on the staff. And, no, I couldn't comment.
Mr. Watkins: Amy can't comment, John, but I can. You know, we've sort of danced around this issue a little bit but in my judgment I mean the disclaimer is there for a reason. And it's there, rest assured whether it affects the standard or not it will be defense exhibit number 1. And I think it's completely ineffective to change anyone's legal liability in a deal. I mean, if a deal goes south, look left, look right, you can rest assured you're going to be named as a defendant in the lawsuit. And the language that's been proposed does nothing to change that.
And if what we're attempting to do is inform investors about what the underwriter's level of involvement has been, the standard does not review – the standard – the review is not the standard as the position paper sets forth, the standard is having a reasonable basis for believing the key representations. That's the standard. The review is the physical act that's required.
And so if there's going to be – I don't have any problem with disclaimers if it's appropriately tailored to address whatever information is being delivered. But just a general disclaimer that you don't guarantee something I think is ineffective and should not be used. And if it's going to be used and we're going to develop some sort of standard to put in it needs to go further and explain to the investor what the underwriter's responsibilities are under the federal securities laws, which is having a reasonable basis for believing the key representations.
Moderator McNally: Returning to the original theme of trying to see just what's going on in the marketplace today can people speak as far as due diligence sessions, are they scheduled? Is there time in the schedule to properly conduct them? Have they changed over the last few years? Just what is people's experience with due diligence as far as negotiated offerings?
Mr. Smitherman: Yeah, I think the answer is a resounding "it depends."
Moderator McNally: It sounds like calls, facts and circumstances.
Mr. Smitherman: It does indeed. You know, my good friend Sylvia Garcia is in the audience from the city of Houston, the controller. And I can tell you that the city of Houston does a great job in conducting due diligence with everyone in the working group. But I don't think that's uniform across the issuer spectrum.
I mean there are some who invite everyone, they invite all the co-managers, they invite all the lawyers. But then there are others that don't. I mean you might be lucky if you have a conference call.
Moderator McNally: And does that affect whether or not you bid on a transaction, whether or not you think you've satisfied your responsibilities, for example?
Mr. Smitherman: You asked about negotiated.
Moderator McNally: Yeah.
Mr. Smitherman: Well, in a negotiated transaction it – obviously I'm going to be more comfortable in a transaction where we have been involved in due diligence unless it's an issuer that we've done a lot of business one, one that I'm very familiar with, one that I have a high degree of empirical and anecdotal knowledge of, then perhaps we don't need as much.
But I get very uncomfortable if it's an issuer for whom we have done no deals and they have not conducted what I would consider formalized due diligence.
Moderator McNally: But what does "very uncomfortable" mean? Would you nevertheless underwrite the transaction?
Mr. Smitherman: You know, I would – Yeah, probably.
Mr. Smitherman: Depends on the spread.
Moderator McNally: I thought that might be the answer.
Mr. Cobbs: My experience is it's not a problem negotiated through due diligence –
Mr. Cobbs: My experience is there's no problem in a negotiated transaction. There's plenty of due diligence. The problem comes in competitive. And this is why I asked about the dual standard. Underwriters don't get the same benefit. There are no conference calls, there are no due diligence meetings, it's much more cursory. We basically get the document which they haven't helped prepare.
Do you have conference calls, Ben, or do you have due diligence meetings when you sell?
Mr. Watkins: No, we don't. You know, the lines of communication are open. One of the things that we can do in the issuing community and we need to be mindful of, and we certainly do it in the state, is not to delivery an OS – if we're going to execute a competitive deal, is not to print and mail one day and execute the deal the next day. That's really in no one's best interest.
And one of our responsibilities is to make sure the papers get on the street and people have adequate time to review the information. And if you've done your job that should help in the execution of the deal not hurt you. I mean, refundings are a different issue. But one of the things that we try to do is a minimum of three business days for the papers to be on the street to give people an adequate, give underwriters and investors an adequate opportunity to review the document.
Mr. Smitherman: One quick comment on what Billy said. I think what is particularly bad in negotiated transactions is when you're a co-manager. There are very few issuers in my experience that include the co-managers. And God help you if you're a selling group member in any due diligence. And, yet, I think you're along for the ride just like a book runner.
Moderator McNally: We've been talking about the due diligence or lack thereof and due diligence sessions at the level of the investment banker. I'd like to ask what the situation is as far as the supervisory responsibility if you will.
Once you've determined to underwrite the deal what is the level of review as far as, if you will, some kind of committee of oversight? I mean just who determines at the investment banker level whether a deal should be brought to market?
Mr. Smitherman: Well, that's going to depend primarily upon the issuer, the rating, complexity of the deal. If it's AA-minus City of Houston Water and Sewer or City of Houston GO, that is not going to require much oversight at all. I mean we'll have a call with the underwriters and we'll talk to the salesmen, but in terms of getting someone from compliance and someone up the chain of command.
On the other hand, if it's a single B hospital transaction or a developer-related transaction then we actually have a commitments committee that will assemble itself and we'll talk about whether we're willing to accept the risk of that transaction.
Moderator McNally: Just as concluding this discussion on the due diligence responsibilities, what I'm coming across more and more frequently in the situation of private placements is the investors say, no, we don't want you, the investment banker, labeling yourself as a private placement agent. And we don't want to be buying directly from the issuer. We want whatever imprimatur we get by having this called a limited public offering by which you underwrite.
Is that something you would ask for, Chris, as far as before you purchase a new security if you saw it was a private placement?
Mr. Ryon: Not necessarily, no. If we were going to look at lower rated private placements we're going to look at it depending upon what the underlying strength of the credit is because ultimately that's what is going to pay us.
Moderator McNally: Let me ask it another way, to the extent an investor does come back to the investment banking house and say we'd like you to put a different hat on, not be the private placement agent but be the underwriter, what do you think you're getting by that sort of denomination?
Mr. Ryon: Well, we're getting the underwriter to be with the issuer if there's a problem.
Moderator McNally: Barry, is that your understanding?
Mr. Smitherman: Well, I think that speaks to the point that I've been making earlier which is I mean some of this is a matter of negotiation and contract, notwithstanding Amy's comments about, you know, these are federal securities requirements. In the type of deal that you articulated, we are being paid to help tell a story on an issue that doesn't tell its own story. And I think in that example Chris is expecting us to put our imprimatur on it. And, yeah, we're liable on that. No question about it, if it goes south, you ought to come after us.
Is that, Chris, your –
Mr. Ryon: Absolutely.
Moderator McNally: Having this –
Mr. Ryon: I'll probably come after you anyway.
Mr. Smitherman: Yeah. You probably will.
Moderator McNally: You have best success if you say you're private placement.
Mr. Smitherman: Yeah, right.
Mr. Schuetze: John, may I ask, are the external auditors being invited to these diligence sessions?
Moderator McNally: Yes. They are.
Mr. Cobbs: Not very often.
Ms. Starr: You don't think so?
Mr. Cobbs: Not very often. I don't see auditors being at due diligence sessions. Again, I go to a lot of them.
Mr. Schuetze: Is that because of the audit contract between the audit firm and the issuer?
Mr. Cobbs: No. The most you get is a cursory update. And usually the auditors don't do that. You may get interim statements, six month, you know, financials. And sometimes there's not even a release by the auditors. But we don't see them playing a significant role.
I think one of the most important things, but that happened 20 years ago, was going to GAAP and having statements audited by nationally recognized firms.
Mr. Schuetze: What do you mean by get a release from the auditors?
Mr. Cobbs: Well, I mean get a consent. In the corporate market you normally get a consent.
Mr. Schuetze: Consent to use the auditor's report?
Mr. Cobbs: You don't, you know, you don't see that nearly so much. That's just part of the contract to have the ability to use the most recent financials.
Moderator McNally: Yeah. Let's touch upon that because what I'm seeing more and more frequently is that there is a request to include the audited statements. And the auditor will say, that's fine, here is our fee of $12-15,000 for doing that. And I guess the question is, what do you do when you're in that posture? Do you pay the fee? Do you simply say the statements are ours, we're going to include them without your permission? I mean, how are people responding to that?
Mr. Cobbs: I think most people have to make contracts – Most people have to make contracts that they can use it rather than having to pay a fee every time. That's just ongoing business.
Mr. Schuetze: Well, but wouldn't that contract also specify that if the auditor is going to sign a consent consenting to the use of his or her report that the auditor then would be able to do the necessary down to date review procedures?
Mr. Cobbs: I don't see that.
Mr. Schuetze: You don't?
Mr. Cobbs: I don't see that, no.
Mr. Schuetze: I just wonder why the auditors are allowing the consenting to the use of their report which may be months old and then not doing the minimum review procedures that are specified in the auditing literature for accountants. That just sounds strange to me.
Mr. Cobbs: I just think it's pervasive in the municip – in the public, public finances as in corporate finance. I just don't think it's there.
Moderator McNally: What's pervasive?
Mr. Cobbs: Huh?
Moderator McNally: What in particular is pervasive?
Mr. Cobbs: I think that is pervasive in the public finance market as in the corporate finance. Corporate finance they bring down the financials of the most recent period to get a stud period.
Mr. Smitherman: So even leaving aside a stud period question, so is what's happening then as far as you see that auditors are not doing their bring down procedures as Walter had mentioned, is there any disclosure in the official statement as to what the audited statements in fact represent and what they don't represent?
Mr. Cobbs: Well, there will be an appendix usually.
Mr. Cobbs: There will be an appendix. The auditor's statements will be an appendix for the OS. And that's pretty much it. I mean do you see anything different, Ben?
Mr. Watkins: Well, we've had a little bit different experience. But your experience is much broader across the issuing community. But we've had a different experience, and that is where the auditors just to a naked consent they are requiring, their internal procedures require premised upon their professional standards, that they do a bring-down. And I don't believe that – I don't – I'm not a – I'm a recovering accountant but I don't – I've read the literature and they're borrowing a concept from the '33 and '34 Act where if an accountant is associated with a registration statement that they have responsibility, they have statutory liability through the date of the registration statement.So that concept is migrating over to the municipal market and is inappropriate in my judgment. It presents problems for me because all I want is the consent to use their audit report. The audit report speaks as of its date. And I'm not intending to give any – give the investors just by virtue of the fact that I've gotten the consent to use the financial statements the impression that the accountant has done anything.
Moderator McNally: But, Walt, maybe you can speak, when the accountant says if you want to include this you have to pay this fee, but understand that we're requiring this fee because there's these additional procedures, what are those additional procedures they do?
Mr. Schuetze: Those additional procedures are primarily inquiry. Inquire, inquire, inquire. Read, read, read. There are almost no substantive auditing procedures that the auditor would do in a down to date review.
Let's lay aside the law for a minute. Let's think about this from a common sense standpoint. The reason the financial statements are there is that A) they're relevant and B) they're material. Now, if they're not relevant and they're not material, take them out. But if they are relevant and they are material, they're in. If they are relevant and they are material then the investor deserves the best information that he or she or it can get. So have the review done and hold the auditor liable for having done what he or she did so as to get the best information to the marketplace. Don't give the marketplace half-baked information.
Mr. Sensale: Just speaking from the norms of perspective of what we've seen so far, and we see almost everything that comes through, the majority of the audited or the financial and operating data that's included in the official statement is to the last fiscal year-end. So if a deal, if a fiscal year-end is March and the deal comes to market in September you're going to lose out on six months of financial data that could have been updated.
So that, there is – we haven't seen bring-down much at all.
Mr. Cobbs: That's what you get.
Mr. Ryon: That goes to the question that was raised earlier, when you're in that position you'll ask for maybe unaudited financial statements to see where you stand now. Understanding that they are not audited. But you're going to look to see has there been material that you're going to see changes from the last audit and then pose your questions around that.
Ms. Starr: So is the sense that I'm getting then that the only financials then that may be included in OS is, say, that are done six months after a fiscal year-end would not include the unaudited stub period?
Mr. Cobbs: What I say is that issuers put in their own preliminary estimates. Let's say year-end is June 30, which is typical, and you'd have a transaction in October. And the new audit isn't out yet. You have year-end '98, June 30, '98. And then you have a preliminary results for '99 put out by the issuer. But you don't have an accountant blessing the information. There is no bring-down.
Moderator McNally: And that's the question I wanted to ask was, Chris, you speak of the financials get sufficiently old that you want to see some stub information. And I guess my question is, is that simply from the issuer or do you want to see that stub information, even though it's unaudited, at least a bring-down review having been conducted? And do you, would you as an investor inquire as to whether or not that had been done?
Mr. Ryon: I had to join the chorus but again I'm going to say it depends. If it's the state of Florida I'm going to be comfortable with looking at the audited statements and hearing what the state of Florida has to say about their credit and what's happened in the interim period.
If it's a lower rated hospital and I have to look at nine months of stub periods since the last audit I'm going to ask for an auditor to do some work on that.
Mr. Watkins: I would reiterate what Chris says because, for example, on a revenue credit I mean we routinely include stub period numbers. And we look at the corporate model in terms of the timeliness of the disclosure, you know, 45 days after the end of the quarter and 180 days after the – 145 days after the end of the year to determine whether or not we need to include stub period or not.
But that being said, it's – I have to use my judgment as an issuer about whether or not there's value added to have a review performed and involve the accountants. And from a process standpoint that ought to be my decision, not necessarily mandated by regulators about what is appropriate and what isn't appropriate. And in certain contexts, as Chris has mentioned, it's entirely appropriate to have the accountants involved in getting assurance that the numbers you're getting are comparable and have been evaluated by the accountant.
But there are other situations where we are including stub period number where the involvement of the accountants are not – should not be required and are not necessary in order to give Chris the information he needs with the level of credibility that I think is demanded by the marketplace.
Moderator McNally: But that's you as the issuer – and I recognize it's your document – making that decision. And I guess the question I have for Barry is, I mean are you comfortable knowing that the decision has been made that you're not getting that letter? Or is that better part of your inquiry?
Mr. Smitherman: If we can get the letter without the issuer having to pay up for it, that's great. Obviously, we're going to be interested in getting as much comfort as we can. And I'll tell you, there have been times –
Mr. Schuetze: When you say "the letter" do you mean a comfort letter or do you mean just a consent to use the report?
Mr. Smitherman: At times, both. But at a minimum the consent letter to the extent that we can get a bring-down, depending upon how long it's been since the auditeds were out. And if it's something where we think that that's going to help in the marketing of that particular issue we'll move for that. And, in fact, at times we have made for that. I don't want to make that a general practice for the issuer community, but sometimes it makes a difference.
Other times, again, depending upon the credit if it's, you know, Harris County or University of Texas AAA puff, you know, I'm going to be very comfortable with the information that they're providing without it having to be updated or brought down or a consent letter, anything like that.
Mr. Cobbs: I think it's more pragmatic. I think it's a question may not get a rating that you want or you may not get buyers unless you have a low graded credit. You may have to come up with a comfort letter as well as a consent. Just but I think it's pragmatic. I don't think being asked to have it, his issuers, I don't think it should be forced on him.
Moderator McNally: But I guess that the question, Walter, is to the extent that the determination has been made by the issuer that there's been no material changes, they don't think there's any value added, if you will, by the bring-down, they view the financials and the audit report as theirs having already paid for it, what is their potential liability if the audit says, You need my consent, and they say, Well, we're going to publish it anyway? We're going to put it into our official statement. What are the responsibilities there or potential liabilities?
Mr. Schuetze: I don't know that I have a good answer to that question. I think the auditing community, if I go back to when I was in practice where I did a lot of '33 Act work, the auditors there would be, of course, following the rules. And to the extent that the rules are migrating over to minis the auditors are going to try to do that.
I keep going back to this question about is the information relevant and is it material? If it is, then I suspect we should bring it – I think from the standpoint of market efficiency we should, and best pricing and everything else, we should bring it down as close to as possible prior to the sale.
I don't know what the answer is in the auditing community if the issuer refuses to pay for the consent and the whatever procedures the auditor would do to bring his or her work up to date. Now, it's minimal work, to be sure, it's minimal work. And if there were just a disclaimer by the issuer that the auditor Smith & Smith did the audit as of September 12 and that's the date of their report and nothing more is implied, I don't know what the answer is.
Moderator McNally: Yeah, I mean you would further, to provide the accurate disclosure you would say that permission of the auditor was not requested so the investor would know that whatever procedure they normally do had not been done. So there is full disclosure of the situation. And the question is can that be done or is there any liability?
Mr. Schuetze: Well, I don't know about liability.
Moderator McNally: Yeah.
Mr. Schuetze: Can it be done? That may be a matter of contact between the auditor and the issuer.
Ms. Starr: But I think, John, the other related point though is in the disclosure that you're talking about how do you make it clear that the investor's not misled into thinking in terms of how they're interpreting the audited statements and the audit report as being included? I mean that's, that's one of your key issues that you're looking at is, is the inclusion of an audit report without a consent misleading investors into thinking that, say, nothing has happened from the snapshot date of your fiscal year-end to the date of, you know, your OS?
Moderator McNally: Yeah, I wasn't proposing you simply include it. Because I think that does create the implication that there has been some additional procedures done. I'm proposing you include it, you say the audit speaks as of its date, you did not ask permission for inclusion and, therefore, no additional procedures were done. Full disclosure as to the facts, and I guess the real question becomes whether or not there is in fact some change which has been brought forth by that procedure.
What we've been touching on is really one of the areas of the '94 release. If you recall, there were six areas the Commission spoke to about areas where improvement is needed and financial disclosure and stale audits was one of them.
Let me go through those areas and then we'll discuss each one of them in turn. The first one was conflicts of interest and other relationships or practice.
The second one was terms and risk of securities, including particularly derivative securities. And, as the Chairman mentioned this morning, very timely did that come out shortly before Orange County.
Financial information, the availability of continuing information, clarity and conciseness and delivery of official statements.
And there's a lot of questions here that have been coming up to me. And I want to let you know that in going through them I think we will address them as we go through these six points.
In particular, let's start with the conflicts of interest. Whoever wants to start. I mean, what is the information, what procedures are undertaken to determine whether or not there is a conflict? And to the extent one is found, what do you do? Is it simply disclosure? I mean, just how is that handled and has that changed since the '94 release?
Mr. Smitherman: One practice that we see is a lot of issuers will include in their RFPs a question about do you have any conflicts? And oftentimes that terminology is not defined but it's an attempt to try to get the information on the table before they go about selecting investment bankers. And that, I think that's gaining fairly widespread acceptance.
Billy, do you see that in your product?
Mr. Cobbs: To me financial advisors have a fiduciary responsibility to the issuer and to the buyers and there's just no place for any sort of thing like this. There should be no fee splitting, which was exposed several years ago. I don't think people should hire consultants to go out and get business. Just like we shouldn't have contributions.
Our firm adhered to G-37 as soon as the underwriters did. We helped SEC get extended financial advisors. I think there's no place in our field for this type of practice. And I just don't think anybody that has a conflict of interest should be out of the transaction.
Moderator McNally: Barry, I mean you were speaking to the fact that the issuers asked you about conflicts. I mean do you in turn as part of your inquiry determine whether or not there is some conflict between a board member and the obligor on the agreement or whatever? Does it work the other direction?
Mr. Smitherman: Probably not as well as it should. And I think it's because it brings into account human nature. I mean, this can get a little sensitive, sitting around the room, okay, who here is related to the mayor within the second degree of consanguinity? I mean, how far do you go with these kind of questions? And I think some of them are very relevant.
I mean, if there is clearly a situation where someone appears to have gotten in a deal because of something untoward, that ought to be on the table. But, you know, you're dealing with human beings and you're dealing with people that you aren't handed people that you want to do repeat business with. And, again, I think what we make as underwriters is a judgment about materiality. I mean, if someone is married to a distant cousin that's, you know, been divorced from the mayor that probably doesn't matter. But some of it probably does matter.
Ms. Starr: But what about asking about financial and business relationships between parties, which I think may be where John was really going was, you know, do you ask what I'll call the tough questions as to the various participants down the line in the transaction?
Mr. Smitherman: Yeah, we would look to I think a couple sources of information to try to get comfortable. One would be the filings on G-38. I mean, we would know going into the transaction what consultants the co-managers would have. And we would also look to the issuer to share with us any information that they have received through their inquiry. And I think almost all the issuers that we deal with these days have made such an inquiry.
But, you know, we probably don't line people up and say, okay, you know, every one of you spill your guts out and tell me what the deal is.
Ms. Starr: Let me take an obvious example.
You've got an IDB financing. One of the board members of the industrial authority has a separate business relationship with the developer or with the president of the company that's getting the $10 million financing. Okay? Now, the question is now where – that's a nice little relationship there. And did the company get the IDB financing because of this relationship and this arrangement? I mean, that's –
Mr. Smitherman: Yeah, I, you know, I'm reluctant to get into the whole IDB area because that's completely different.
Ms. Starr: Well, no, that's really an example.
Mr. Smitherman: I mean it's a completely different set of circumstances. And, you know, I know that some of the releases have spoken to the Commission's efforts perhaps to bring greater regulation in that area when you've got corporations essentially accessing the tax exempt market because they can under statute. I just think that's a completely different set of circumstances.
Ms. Starr: Okay, then make it a hospital. I mean it doesn't matter. No matter what test pattern you use the real question is how far down the line do you go into the depths of the transaction itself to make sure that there is not something that people should know about when they're investing? It's not necessarily bad in the relationship – or the arrangements are not necessarily bad but they are things that investors may need to know so that they're able to make informed decisions.
Moderator McNally: Why do they need to know it? I mean as far as a conflict with how the underwriter was chosen, for example, it may indicate that the underwriter – I'm the investor. I want to know the underwriter is going to perform its obligations and I want to know that it's been chosen properly, it knows what the due diligence procedures are and it's not simply going to put the issue to market without having done that. So as an investor I want to know that relationship.
But you're speaking of relationships between – on a hospital financing that, I mean why are they material to the investor I guess is the question?
Ms. Starr: Well, I think one of the questions that the Commission pointed out in the interpretive was, you know, when you have relationships among parties in a transaction it may be that it may not directly relate to the pricing or it may relate to the pricing, or it may be that the money may have been used better for a different type of transaction or with a different party. As an investor do you want to know if, you know, Joe Blow and Sam are, you know, in business together? Does that – Is that relevant to you or is it not relevant, I mean?
Mr. Ryon: If I'm looking at, if I'm looking in your first IDB where you've got maybe a developer and a couple of the parties, yeah, I want to know a little bit more about them, their involvement, what their involvement is as we go lower in the credit spectrum. Does the issuer come to market? Does it need market access? My need to know is less for that type of issuer.
Moderator McNally: In defense of that answer, the '94 release says "the range of financial and business relationships, arrangements and practices that need to be disclosed depend on the particular facts and circumstances."
Mr. Schuetze: May I ask are the issuers or the underwriters asking the auditors to explicitly say something about their independence? In other words, that the auditor doesn't own any of the previously issued bonds and is not going to buy any of the bonds to be issued and that none of his or her partners owns any of the previously issued bonds and is not going to buy any of the bonds to be issued?
Mr. Smitherman: I have never made that inquiry?
Moderator McNally: It's a very good question. But I've not heard it asked.
Ms. Starr: Ben, do you ask your auditors?
Mr. Watkins: No, we don't.
Moderator McNally: Is there an auditing standard of some sort that precludes them from doing the audit if in fact they do have that conflict?
Mr. Schuetze: Well, there are rules published by the AICPA, by the various 50 state boards of accountancy and the territories. Practically all of those rules, including the SEC's rules, have fairly strict independence requirements. And one of those independence rules would be that the auditor may not have a financial interest in his or her client. Therefore, if the auditor owns a previously issued bond of X I would think that that auditor would have a financial interest in his or her or its client and would thus not be independent.
And if the auditor has a commitment to buy any of the current issue I would think that he or she or it would not be independent.
Moderator McNally: Well, to the extent the auditor's letter says we are independent certified public accountants, bla-bla-bla-bla.
Mr. Schuetze: That's normally in the heading, isn't it? Well, it may say –
Moderator McNally: Well, it's normally in the letter.
Mr. Schuetze: It's in the letter. Yeah, right.
Moderator McNally: Can we then not assume that they have done whatever they had to do to say in fact they're independent?
Mr. Schuetze: Well, but the underwriter said they do everything. Don't you inquire of them too?
Mr. Smitherman: Yeah, let me ask this question. Not practicing in corporate –
Mr. Schuetze: Safeguards alone don't work.
Mr. Smitherman: Not practicing in the corporate arena, are these types of inquiries made when Exxon does a debt offering, I mean?
Mr. Schuetze: There are procedures, although informal, that audit committees go through in discussions with their auditors about their auditor's independence as to Exxon or General Electric or General Motors or any of the other U.S. generals.
Moderator McNally: Another area of the '94 release other than the conflicts was terms and risk of securities. And two areas in particular we want to discuss today were the degree to which the investors are looking to the underlying ratings for credit enhanced transactions. And, also, what's happening in the derivative market? What information do investors want to see? Are you talking about simply the current exposure? Are you talking about the investment policy of the issuer?
Let's start with the underlying ratings: are they obtained? are they sought? are they – just what happens with them? Let's assume it's a bond issuer deal as opposed to an LLC.
Mr. Ryon: We look to the underlying credit but we also look for – and this brings up another issue with disclosure as to what rights are being ceded to the insurance company that is insuring the bond? There seems to be an increase in the insurer's demanding more of the bond holder's rights because they believe they are first in line for payment of principal and interest.
But the disclosure there that I believe is important is that sometimes the insurer and the bond holder's interest are not parallel. So you have to make enough disclosure there so that an investor can determine whether their interests are parallel and if they're willing to take on that type of risk.
Moderator McNally: I mean, having seen that it's insured and then having looked at the contract and whatever rights are given to the insurer are you also concerned with, if you will, the underlying rating, not merely the fact that it's AAA but if there is an underlying rating provided? Do you see –
Mr. Ryon: As an investor we're going to make an independent determination of what we believe the underlying rating to be.
Moderator McNally: So you're not dependent upon a rating from the rating agency for that, for the underlying?
Mr. Ryon: No. The ratings agencies will put AAA on it, but for the sake of the insurance. Again, we look to the underlying – we look to our own evaluation of the underlying credit.
Moderator McNally: Do you think the underlying rating – I mean you have the ability to do that. As far as a retail investor do you think it's sufficient the fact that there is a AAA on it or should there be some underlying rating provided to the market?
Mr. Ryon: I think it's sufficient that they have the AAA from the insurer. But, again, getting back to my earlier point, I think that the underlying – the investor has to understand what rights they're ceding to the insurance company and how that is changing. And then to be able to make a determination as to whether they believe their interests, their best interests are going to be parallel with the insurance company.
Moderator McNally: Barry, are you seeing an interest in the underlying ratings from the retail investors or do you as the underwriter want to know what the rating agencies provide as the underlying rating? Or is it the insurance related level of the inquiry you take?
Mr. Smitherman: Again, I think it depends upon the particular issuer that you're dealing with. Obviously, if it's an issuer that's in the market frequently the market is going to understand what their underlying rating is. And you may have – they may have chosen to use insurance because when you did a cost benefit and analysis the day before pricing it was more efficient to use insurance.And I would suspect that retail investors are interested in knowing what the underlying rating is. I would be very surprised, Chris, if they understood any types of responsibilities that they were ceding over to the insurance company. I think it's a good point.
Mr. Ryon: Well, that's why that disclosure has, I think has to be beefed up.
Moderator McNally: Turning to derivatives, I mean what do you like to see as far as the disclosure, are you interested in not only the current investment but also the investment policy? And what is the level of inquiry that's done as far as the investment policy of the issuer?
Mr. Smitherman: I think we should distinguish between the investment policy of the issuer –
Moderator McNally: And the current portfolio?
Mr. Smitherman: – well, and a debt instrument that might have a derivative component to it. I think those are two distinct areas.
Yeah, I'd like, again I'd like Chris' take on what he wants to see if an issuer is doing a floating rate transaction and they swap it to fixed?
Mr. Ryon: Well, if we look at the issuer's investment philosophy in terms of what they do with their cash management role I want to understand what that philosophy is, I want to understand the parameters of their philosophy. To the extent they choose to use a derivative security as long as it's allowable within that philosophy I'm pretty indifferent to that because it could probably replicate the same risk for term potential in the cash market in terms of adding risk to the fund or taking away from it.
In terms of whether in their overall the way they structure their debt, if they have swaps involved I want to make sure that I understand that and I know what their exposure is there also.
Moderator McNally: Ben, Billy, are you seeing inquiry into the investment policy of the issuer as part of the normal questions that are coming up now?
Mr. Watkins: We include a section dealing with the investment policy of the state, and largely it was a result of Orange County and which, you know, precipitated the interest in investors understanding what the risk profile was on the investment side of any governmental entity. And so we have beefed up the disclosure in that area to address that particular issue.
Mr. Ryon: California issuers now are just – they have probably the best investment philosophy disclosure going on because of Orange County. They've tightened that up. They've tightened their constraints that they allow their managers to invest within. So that's worked there.
Geographically it varies on the degree to which other issuers will do that.
Moderator McNally: Walter, to what degree do the financials have to address the derivative securities and the various risk, if you will, of the portfolio?
Mr. Schuetze: I don't know whether the Governmental Accounting Standards Board has addressed that issue. I know from the standpoint of commercial issuers there is extensive disclosure required by the Financial Accounting Standards Board on derivatives and the like. And the SEC has extensive disclosures for corporate issuers in the regulation. I just do not know whether the Governmental Accounting Standards Board has issued such guidance. And maybe somebody in the audience does.
Mr. Smitherman: Ben, I'd like your opinion on the following: you know, the evolution of disclosure on what underwriters was making started with us disclosing what our spread was. And then if there was an open market portfolio we disclosed what we made on that. But I haven't yet seen anyone disclosing if there was a derivative transaction as a part of the debt issue as to what the hypothetical profit would have been, understanding that maybe it can't be 100 percent determined today.
Are you seeing that? Is that something as an issuer that you care about? And I guess I'd like some opinion from the SEC staff as to whether that's the kind of stuff we're supposed to put in the offering document.
Mr. Watkins: In performing my role in policing the transaction it's very important for me to know where every dollar in the transaction goes. That's just part of my responsibility in overseeing the transaction.
That being said, obtaining the information on derivative transactions is very, very difficult. And that information is closely guarded, considered proprietary. It's what goes on behind the curtain. But we have been in certain contexts been able to at least assess that level of compensation because that's going to affect my decision on whether or not to enter into the transaction.
That being said, I don't know how relevant that is as a matter of disclosure. So my motivation is just from a business standpoint and knowing how much money –
Mr. Cobbs: Yeah, that's what we do for our clients. We have a –
Mr. Cobbs: That's what we do for our clients, New York City. Alan Anders is here from the city and can speak to it. By the way, Alan, what is the city's disclosure on derivatives? Do you know what the requirement is? Because, you know, every month for the city we get what their liability is for their various derivatives they have outstanding. And so every month they're up to date and they can manage their
Mr. Schuetze: Are the issuers disclosing the fair values of the outstanding derivative contracts at any date? Balance sheet date, three months later?
Mr. Cobbs: That's what I, I don't know whether the city is – I think at year-end they do disclose if they have yen financing.
Mr. Schuetze: I would just point out that in the "Wall Street Journal" of about ten days ago there is a full-page add for a new enterprise that's called CFO.COM. CFO.COM has the ability to price immediately all types of vanilla swaps and will price apparently complicated swaps, complicated puts, complicated calls, complicated callers for free. So there isn't any problem in getting this information. There are people out there who will do, push the pencil for you right now.
Mr. Watkins: How credible is anything you get for free? That's my only question.
Mr. Cobbs: Well, we get it every month.
Mr. Schuetze: Huh?
Mr. Cobbs: We get it every month for our clients. And they have it, year-end and then they disclose that they have yen financing, and they disclose where the yen is relative to what their swap arrangement was when they swapped the dollars, and then swapped from fix rate yen to floating rate dollars.
Mr. Schuetze: Do they give the user of the information sufficient information to where he or she can price the contract?
Mr. Cobbs: I don't think so, no.
Ms. Starr: Barry, I have one –
Mr. Schuetze: Well, the yen has gone from 120 down to 105. I would suspect that that price is now –
Mr. Cobbs: Well, that's right. That's what we, that's what we disclose. That's what they have every month is what the liability is relative where they entered into the contract.
Mr. Schuetze: Well, but the liability would be only the amount of cash currently payable or if the contract splits the other way.
Mr. Cobbs: That's right.
Mr. Schuetze: The amount of cash currently receivable. But if it's a 20-year swap you've got 19.5 years that you need market price information for.
Moderator McNally: There's really two things we're discussing. One is whether or not you disclose the value, if you will, of the portfolio and the investments. And other one we were touching upon is whether or not there's disclosure of the compensation to the underwriters to the extent they're involved in structuring this.And I think the answer was you're interested but it may not be material to you. Barry or Amy, what are you seeing on the research?
Ms. Starr: Let me sort of step in on both points. One, Barry, from the standpoint of the underwriter and what they're making I think the real question is does the participant to the transaction need to look at the disclosure to make sure that there is adequate disclosure in the OS with respect to both the proceeds of the offering as well as underwriter compensation. I mean, beyond that, you know, it really is up to the participants to assess whether in fact there is adequate disclosure depending on the particular transaction.
Moderator McNally: Amy, as far as the compensation I understand that with respect to the underwriter's take-down, and perhaps in addition whatever they're additionally making in relation with the issuer, investing the portfolio or involved in the swap or whatever, all of that goes to what they're making with the issuer and perhaps influences their judgment, if you will, in underwriting the transaction.Let's say it's not with the issuer. Let's say it's a matter of buying a security and then wanting to do something to it in the marketplace, is that something that has to be disclosed to –
Ms. Starr: Again, what I would – I mean I – one thing that I always suggest is if there's not learning in the muni market is to look to the corporate market for guidance. And that I would suggest the same in this context. And –
Chairman Levitt – What do they do there, do they disclose the compensation?
Ms. Starr: Again, depends on the trans – depends on the company, depends on the deal. I couldn't tell you that.
Mr. Smitherman: Let me make two points with regard to what Ben said. If you've got someone who's providing derivative trades for you and they're not telling you what they're making, you should fire them. Because I think that's a piece of information that you're entitled to. Whether that's a piece of information that goes in the official statement may be debatable.
Moderator McNally: Are you talking about a derivative with the issuer?
Mr. Smitherman: Yes. Yeah, I'm talking about a derivative that is part of a primary offering where you either turn it into a tender option bond or it's a swap to floating or a fixed rate swap or a floating rate swap to fixed, you ought to know that.
Moderator McNally: Let's say you buy it in a competitive deal, not a negotiated, and then in turn you're going – I mean, clearly there's nothing – is there anything there when you're in turn reselling it about you're securitized in some manner. Does the investor need to know what you've made on doing that?
Mr. Smitherman: You know, at that point we've clearly become an investor. And I think to the extent that they are interested in knowing what we've done I mean I think that as a good customer/client relationships we ought to be forthcoming. Now, maybe they're not entitled to it. But I think it's good business.
Ms. Starr: I think the related issue, too, is whether the impact that it has on the ability of the issuers to disclose their risks as end users of derivative products. Because, you know, to the extent that they're engaging in a derivative transaction to sell out their bonds they're subject to a risk as well. And that's something that was addressed in the '94 interpretive release as well.
Moderator McNally: Another point in the '94 interpretive release was the availability of continuing information. And I think generally that's being handled now by disclosure in the official statements as to what the continuing disclosure agreement is. So I don't think there's any confusion in the marketplace about what you're getting on a continuing basis.
The next point in the '94 release was the clarity and conciseness of the offering documents. And, Amy, perhaps as an introduction to this I mean what is the standard now – what is required as far as plain language in the corporate area?
Ms. Starr: In the corporate arena anybody who is selling securities on a registered basis has to have their cover page, summary and risk factors in plain English. Now, that's really, you know, the beginning of your document.
You know, I pointed out to people that I understand that we've seen counsel who have actually put descriptions of the trust indenture into plain English. And it's publicly available on EDGAR. But, I mean the balance of your document needs to be clear.
There is a emphasis on use of bullets, making sure there is a very limited use of defined terms, so that it's much easier for an investor to understand what it is that they're investing in, what the risks are, what the terms of the securities are.
Mr. Ryon: John, I'd like to, if we could, go back to one point you –
Moderator McNally: Sure.
Mr. Ryon: – mentioned earlier about the availability of continuing information and what that is. In our experience we've run into issuers who have said that the rule mandates that, or they've been advised that what the rule mandates is that all they have to do is provide us with their audited financial statements when due. At any period of time that could be up to three months after the end of their – after the end of their fiscal year. And we found that unacceptable and have either tendered some of their floating securities or sold their bonds because of that.
We're not getting the information we need on a timely basis.
Mr. Sensale: Just to also touch on that point, as NRMSIR we receive all the official statements and peruse them. And there have been instances where the continuing disclosure agreement is not even included in the official statement. It's a separate document that you have to request on your own. And the NRMSIR then has to take a pro-active stance to find out what that is simply to have it on record and also for other business purposes.
Ms. Starr: is there not then a description of what the continuing disclosure agreement provides in the OS.
Mr. Sensale: It will just reference, it will reference the fact that another document exists and you'll have no clue as to what's in that document.
Moderator McNally: Well, that's not good practice.
Mr. Sensale: Again, it hasn't – I can think of instances in the past. It hasn't happened frequently. I can think of one issue in particular where you actually had to go out and get it.
Moderator McNally: Well, I mean what we're seeing more and more it's just not worth the risk of trying to summarize it or the trouble of trying to summarize it. You simply attach it as an exhibit and say continuing disclosure will be provided pursuant to this agreement.
There will be – the next panel will address the whole question of when you're in the secondary market I mean what are the concerns in getting the information, are there insider trading concerns, etc. But as far as the primary market are you saying that based on a description of what you're going to be getting and how much time they had to provide the financials you may not buy something once you know what the –
Mr. Ryon: Pretty much we would have already bought it, gotten the information we want. And then when we have secondary market problems that's when we'll tender the bonds or sell them if we cannot get the proper disclosure.
Moderator McNally: Okay. Even though it may be a situation where that disclosure, they're doing exactly what they said they were going to do when they did the primary offering, namely, disclosure pursuant to the continuing disclosure agreement.
Mr. Ryon: For some older securities their interpretation is what is due.
Moderator McNally: Okay. What are people seeing as far as the point, I mean, Amy spoke to what the requirements are, are we seeing plain language in the municipal statements? Billy, Ben, are you seeing it at all?
Mr. Watkins: No. Here's my description of where we are in the muni industry with respect to clarity and conciseness: "Extremely serious warning printed on a separate page in red letters with a yellow background. Unless you're as smart as Albert Einstein, savvy as a half-blind Calcutta bootblack, tough as General William Tecumseh Sherman, rich as Bill Gates, emotionally resilient as a Red Sox fan, and generally able to take care of yourself as the average nuclear missile submarine commander, you should never be allowed near this document."
Moderator McNally: And I didn't even set him up. He just, just brought this with him.
Mr. Watkins: There's a lot to be done in that area. It sort – it's been a natural evolution, I think, the way OS's have developed. And it's really being used as more of a defensive tool. And out of an abundance of caution everything is being put in the document. And we really haven't, as issuers haven't done a great job distilling what information is absolutely essential and using the OS as a means to clearly and effectively communicate with investors. Because that's what we're really talking about doing.
And I think that the SEC has given a lot of advice and guidance on this. We did a pretty good job in adopting GFOA disclosure guidelines with respect to the substance of the information in the OS. And I think that's evolved and we've made a lot of progress on that front. But I think just the physical appearance of the document and how it's written is fertile ground for a lot of improvement in that area.
And we're in the process now of standardizing the cover page in bullet point format and going through the document and rewriting it in such a way not to diminish the disclosure in any respect but just to make it a lot more user friendly. And there's a lot of upfront work involved but, as you know, once you get it done then you can – it will be a lot easier once we get over that threshold level.
Moderator McNally: And I guess I'm interested, too, in whether as an investor, Chris, you care or what it means as far as your ability to review documents in plain language in this area?
Mr. Ryon: Well, we do care about it because it's going to help us review them in a more timely manner, in a more efficient manner. It's going to help the issuers, especially the smaller issuers. When we look at a week where we have, say, 20 different securities coming to market we have a limited amount of analysts that can be used to review these credits. So we're going to begin to tier the credits by where we can get the most bonds and be most effective for our portfolios. So we won't even look at certain issues because they just don't fill – it will take too much time to get to them.
To the extent it becomes more difficult then we have to get our legal area involved, it's going to take more time. We're going to need to get the OS's earlier. That's another area of improvement.
Moderator McNally: I think this is a very important point because generally the reaction of the marketplace has been, sure, plain language is nice, it would be nice if we could do it. It takes a lot of time, it's a lot of work, and it's not going to save us five basis points. But you're telling us it may impact the pricing because it impacts whether or not you're going to in fact even read the OS based on your –
Mr. Ryon: Well, we're going to read the OS for everything we buy. It just determines what we're going to look to buy.
Moderator McNally: Exactly.
Mr. Smitherman: And what you're saying, particularly with regard to issuers that are not household names.
Mr. Ryon: Uh-huh.
Mr. Cobbs: Particularly the first time issuers the language sometimes is very, very dense and opaque and almost rather it not be written by a lawyer. I think to a large extent the clarity depends on which lawyer is doing it. But sometimes it maybe should be done as Ben said be rewritten by lay folks. Or sometimes I'll read over the next day, is an anecdotal story about William Faulkner and The Sound and the Fury, he used to write when he was drunk and the next day he read something in The Sound and the Fury and he said, I don't know what it meant but I liked it so much I kept it. And sometimes I feel that about the OS, the next day I don't know what it means but it's in there. And it's just impossible to understand.
Moderator McNally: Another area beyond the clarity and conciseness in the '94 release was the whole question of delivery of official statements. And I guess I'd like to ask both the underwriters and the investor just what is happening in that area, are you getting, for the underwriter are you getting the OS in time from the issuer and from the investor or are you getting it in time from the underwriter?
Barry, do you want to speak to your experience?
Mr. Smitherman: It's a challenge. This is an issue that we spend a great deal of internal time on. We have probably two people in our firm that are devoted almost entirely to making sure our bankers get the official statements to the investors in a timely fashion. And I'm sure that we're dropping the ball from time to time.
Moderator McNally: Because you're not getting it from the issuer or because you're just dropping the ball?
Mr. Smitherman: Obviously it's the former. Yeah, I think it's a function of their being a lot of deal flow. This, you know, strange as it may sound this is not the only thing that most issuer finance staffs do. I mean particularly with smaller issuers, they may have one or two persons that does everything, including trying to get an official statement printed and delivered.
So, we try to work with them as much as we can. We try to stay on top of it without being a pain. But there – it falls through the cracks.
Mr. Ryon: Especially on the competitive side.
Moderator McNally: There's two parameters here. One is the 15c2-12(b)(3) which requires the underwriter to contract to receive the official statement in sufficient time to accompany confirmations. The rule only requires the underwriter to contract to receive it. And once they've satisfied that contract they've satisfied their obligations, at least under 15c2-12.
But the other concern is MSRB-G-36 which requires the underwriter to file the OS with the MSRB ten business days after the execution of the purchase contract. So what do you do if you just don't – if you don't have it you can't file I guess is the answer.
Mr. Smitherman: Right. We get fined.
Moderator McNally: You get a G-36 litigation suit.
Mr. Smitherman: I mean, again, this is something that we spend a lot of time on, we're working on it, we're trying to improve it. I think every firm on the street is challenged by this, particularly firms that do high volume. And, you know, all I can say is that we're doing the best that we can. I agree with Chris, on competitive deals it's sometimes even more difficult.
Moderator McNally: And is that, I mean whose fault is it, is that the issuer or is that the financial advisor? I mean.
Mr. Ryon: I'd have to say it's the FA's.
Mr. Ryon: Well, when we see a competitive deal coming on the calendar we'll call the underwriters to find out whose got the OS. And a lot of time the Friday before the week it comes to market we'll hear "we haven't gotten it yet," or "we just got it and we'll Federal Express it out the next day."
Moderator McNally: You're talking about the POS now?
Mr. Ryon: Yes.
Chairman Levitt – So you don't even get the POS before you bid?
Mr. Ryon: Well, we don't bid.
Moderator McNally: Well, on a competitive situation you may not get the POS –
Mr. Smitherman: We will have papers before we bid.
Moderator McNally: Okay. But it may not be –
Mr. Smitherman: I think that's required, isn't it?
Moderator McNally: No comment. Bill, is it the fault of the FA's that they're not getting the –
Mr. Cobbs: Well, as I said before, we don't write a lot of OS's. We've just been part of the process, and to say, yeah, responsibility, we always push to try to get it out. If there's a transaction on, say, Tuesday to at least to get it out the Friday before. That's sort of the last possible to get it out. And if it's a start-up, a first time issuer then we'll want to get it out a week before.And the retail order period you want to get it out before the retail order period starts which is the Friday before. But, again, sometimes it is a challenge, it really is to get it out. But I know with a lot of the smaller issuers that the financial advisor probably takes primary responsibility for getting it out. But that's not usually it, you know, we help get it out.
And I think it is a problem. That's why I said before I think underwriters have a real liability and they if they don't get an OS till the day of the offering or the day before it's tough. And it's tough for buyers too. But I don't see any.
Moderator McNally: We'll be leaving the '94 release because I think we've gone through each of the points. But I think in summary, in looking at it, conflicts of interest apparently sometimes questions are asked, sometimes they're not, at least the questions Amy would like to ask.
Terms and risk of securities, sometimes there's not proper disclosure of that.
We had a discussion about the financial information, whether or not there's a bring-down. Clarity and conciseness there's been a very slow movement towards plain language. And delivery of official statements people tell us there's still some probleMs. So interesting analysis I think.
Let's go to just how these official statements are filed. Joe, can you speak to this?
Mr. Sensale: Sure.
Moderator McNally: How they're filed, how you maintain a database and just how people can access the information?
Mr. Sensale: Official statements received from underwriters and other entities cover approximately 70 to 75 percent of those received over the MSRB's MSIL service, which is the Municipal Securities Information Library. So using the filing over the MSIL service pretty much allows our NRMSIR as well as the other three NRMSIRs that subscribe to that service to obtain about 25 percent of those official statements that we wouldn't receive, say, from the underwriter. So the institution, the MSIL service does fill the gaps that we normally – we otherwise wouldn't have been able to receive.
When we receive official statements through either method, either through the mail or through the electronic MSIL service, it immediately gets – the receipt of that official statement immediately gets recorded in a database, in fact two databases, one that supports our products and as an information provider, and also an internal database. You don't have to subscribe to any one of our products in order to get an official statement. All you need do is just call up our repository and they will deliver it to you for around $30.
Again, and it's available immediately. As soon as we get it we turn it around immediately. Now, I know that there has been great improvement with the MSIL service's turnaround time for official statements. So that's even helped us out that much more.
You can access the – in order to get an official statement one would need to call up and just provide the CUSIP or even the description of the deal if you don't know the CUSIP, then you'll be able to obtain it from us. And we would FedEx it to you, we would tax it if necessary. So we're accessing official statements really is not – it's a pretty well – it's a pretty solid mechanism. They are accessed at a much greater rate than, say, financial information documents that are filed simply because I think the nature of the official statement from every interested party as opposed to a financial statement where a lot of densely packed information is in there.
And going back just to touch on continuing disclosure, you would get in the official statement the fact that financial information operating there that need to be provided on an ongoing basis. And it may only be maybe two or three lines of data. But in return you would get several, you would get a whole chapter to touch on secondary markets as compliance. And, unfortunately, people don't access those huge documents as opposed to the one or two-line page of a operating data or a financial information file.
The point being that official statements, I think, the nature of the document itself creates its own demand whereas for other types of documents that are filed that's not the case. Between 100 and 150 official statements are requested at our NRMSIR every month and only between five and ten financial statements are. So it's not the mechanism I think that may be problematic, it's the fact that official statements, the nature of the document itself is what creates the demand for it.
Moderator McNally: I mean the NRMSIR, Joe is telling us it's not a problem because he maintains it, he can always get it right away. Is that your experience, Chris, Barry? Have you tried to access official statements and, if so, have you been able to readily get them?
Mr. Ryon: We subscribe to a service that we get them on microfiche in our office and we haven't had to access them that much. But when somebody, underwriters who are trying to sell a particular deal in the secondary market and we don't have the official statement and can't access it through our in-house system we'll get them from the NRMSIR and we usually receive them the next morning in Federal Express or whatever.
Mr. Sensale: Right. Usually turnaround. Again, there will be another panel on electronic disclosure but the turnaround right now with regard to paper is as best it can be, it's immediate turnaround.Just to further comment on – just to go back and touch on continuing disclosure agreements, just to raise the issue, as the NRMSIR we get to peruse these things. And sometimes there will be a, in the CBA there will be a contract that provides financial information almost a year after the previous fiscal year-end. And I don't know what purpose that serves. Again, that's not everybody. It's a small minority. But, you know, it's something to keep an eye on because if we think that three months of financial information, a lapse of three months is important I can only imagine the impact of the year's financial statement.
Ms. Starr: But it is permitted by the rule.
Mr. Sensale: Yes, it is. You're right. So I mean that's something that maybe you, the SEC, may want to address. But, yeah, practicality-wise I think doesn't really serve much of a purpose. I know you wanted to talk about central repository.
Moderator McNally: Well, I mean it is 11: 00 o'clock. We did, in fact, start early. Nevertheless, there are at least a few questions which didn't get asked. And let me just ask a few of these if I can. Some of these I'm afraid are for me but some are for the panel more generally.
The difference in underwriter responsibility in competitive versus negotiated deals is at least somewhat defined. I guess it's a comment on the '88 release, "somewhat defined.' But what about senior versus co-manager underwriters in negotiated deals, what does the co-manager have to do in our current, this current practice for the co-managers to do it?
Amy, do you want to speak to that?
Ms. Starr: Honestly I'm not –
Moderator McNally: Do you want me to speak to that?
Ms. Starr: Yeah, that would be helpful.
Moderator McNally: The '88 release does distinguish both negotiated and competitive. But also there is a statement in there to the effect that if you are a member of the syndicate and if you trust who the senior manager is to properly conduct due diligence and you have no reason to think they have not conducted it, you can rely upon their investigation as part of your responsibilities.
Another question: My bankers seem to think that the firm has less responsibility for review of OS credits if we are the FA. Is there a difference in underwriter responsibility?
Well, regardless of whether there's an FA in a – I guess this is speaking of they're serving as FA. Billy, what do you view as your responsibility as opposed to the underwriter's review that's set forth in the '88 release? And what do you view your –
Mr. Cobbs: I thought we all help with negotiated transactions. I think it is primarily the issuer's document to be, I think, I'll agree to. But I think after that we're all liable and we all have responsibility. I would say in a competitive sense actually that we've probably got more liability, hate to say it, than an underwriter has because we help prepare the document.
Moderator McNally: Well, I think that's right. I mean I think there I a bit of enforcement actions where to the extent under contract the FA put the OS together, that was one of the items set forth in the enforcement action?
In which statute or Commission rule is the reasonable basis standard found?
Is that simply case law, Amy, or is that defined?
Ms. Starr: The reasonable basis for the underwriters?
Moderator McNally: Yes.
Ms. Starr: It was laid out in the '88 and '89 releases.
Moderator McNally: So, okay, so there is no defined term but you're speaking of what constitutes that is laid out in the '88 releases for both competitive and negotiated?
Ms. Starr: That, yes, it's laid out.
Moderator McNally: Okay. Okay.
I have seen disclosure statements indicating that the rating agencies have received more information than is available in the OS. My question is, why do rating agencies need more information if not material? If it is material, shouldn't it be in the OS?
It's an interesting question because –
Mr. Cobbs: It's a good question.
Moderator McNally: It is a good question. And, Chris, I think you alluded to this. And I think it is the case that information is provided to the rating agencies, and also to institutional investors occasionally, because they'll ask a particular stress test that they want to see before they buy the security. And I think the analysis of those involved in the transaction involved is, well, what does this stress test prove? Is it something they simply wanted before they could invest?
Obviously, if it proves that there is some problem that's not been discovered it has to be disclosed. But it's not uncommon to provide information to both the rating agencies and, frankly, the institutional investors that does not go into the OS and has been asked for by them. Is that your experience as well?
Mr. Smitherman: I think so.
Mr. Cobbs: Chris, when we do an investor presentation what you get is basically the same thing we get, rating agencies get, we use the same book with slightly different pages, so there's not a big disparity in that.
Mr. Ryon: No. Maybe to issuers there isn't but on some transactions we've been asked for information that rating agencies have received and been told that is not published.
Moderator McNally: I'd like to thank all the panelists. In particular I would like to thank the SEC for giving us the opportunity to make this presentation.