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Municipal Disclosure: Future Directions and SEC Rule 15c2-12

This article discusses the results of the NFMA Survey on municipal disclosure practices, the problems with SEC Rule 15c2-12, and recommendations for future directions in disclosure. It also explores the potential of new information technology and municipal websites in improving disclosure practices.

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Municipal Disclosure: Future Directions and SEC Rule 15c2-12

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  1. Bond Buyer Public Finance ConferenceDisclosure: Now It Gets Interesting Gerard J. Lian Vice President Morgan Stanley Investment Advisors, Inc. Roosevelt Hotel New York City December 3rd, 2001 December 3rd, 2001

  2. Introduction A. Summarize NFMA Survey Results B. Comment on SEC Rule 15c2-12 C. Discuss Future Directions in Municipal Disclosure The comments expressed herein reflect the opinion of the speaker and not necessarily the viewpoint of Morgan Stanley Investment Advisors, Inc., the NFMA or the NFMA Board of Governors

  3. A. NFMA Survey Results I. Methodology II. Topics 1. NRMSIR Utilization 2. New Issue Disclosure Practices 3. Secondary Market Disclosure 4. Problems with Rule 15c2-12 Annual Reports 5. Industry Issues

  4. 1. NRMSIR Utilization • Analyst usage differs, depending upon type of information needed • 65% use NRMSIRs to retrieve copies of Official Statements • For secondary market data, 52% use NRMSIRs for 15c2-12 reports while 48% use NRMSIRs seldom if at all

  5. 2. New Issue Disclosure • Most analysts are satisfied with the quality and sufficiency of new issue disclosure • 62% indicate the quality of new issue disclosure was at least as good as that which preceded enactment of Rule 15c2-12 • 50% feel, however, that late delivery of the POS occurs occasionally and 44.7% feel that this problem occurs on a regular basis

  6. 3. Secondary Market Disclosure • 63% feel secondary market disclosure is subject to shortcomings • 77% favor development of a centralized index by the MSRB • 87% would like to see disclosure documents centralized and made accessible electronically

  7. Problems With Rule 15c2-12Annual Reports • Operating Data: 57% find that annual reports lack adequate operating data • Stale Data: Only2.4% find that reports are filed within 90 days following fiscal year end, although 31% were unable to form an opinion • High Yield Market:58% find that annual reporting is inadequate in the high yield market • Short-Term Market: 75% find that secondary market disclosure in the short-term market is at least sometimes insufficient or inadequate

  8. Industry Issues i. IRS Tax Audits ii. Sophisticated Municipal Market Professional

  9. i. IRS Audits • 96% feel that Category 2 and 3 IRS audits should be disclosed while 55.4% feel that all IRS audits (Categories 1, 2, and 3) should be disclosed • 69% felt their firms lacked adequate expertise to evaluate tax risk • 77% doubted their firms would accept a qualified legal opinion and another 17% were unsure

  10. Sophisticated MunicipalMarket Professionals • 68% of analysts place significant reliance on broker/dealers to obtain information for new issue offerings [MAGNY results] • 59.2% of buy-side analysts place at least some degree of reliance on broker/dealers to obtain credit data in the secondary market

  11. B. Recommendations On SEC Rule 15c2-12 1. Nuts & Bolts Modifications 2. Substantive Content 3. Structural Change

  12. B. Recommendations On SEC Rule 15c2-12 1. Nuts & Bolts Modifications • Adopt filing deadlines for financial reports • Encourage timely delivery of Preliminary Official Statements • Include CUSIPs on all documents

  13. Recommendations OnSEC Rule 15c2-12 2. Substantive Content • Enhance the disclosure of operating data • Consult the NFMA Recommended Best Practices in Disclosure as one source of industry practice

  14. Recommendations OnSEC Rule 15c2-12 3. Consider Structural Change • Multiple NRMSIRs • Present difficulties • Inadequate oversight • No central index • Incomplete data • Considerable redundancy • Paper documents predominate

  15. B. Recommendations On SEC Rule 15c2-12 3. Consider Structural Change • Possible Solutions • A. Pool Resources

  16. Pooled Model Benefits Share documents filed with other NRMSIRs Retrieve missing data Ensure consistency of databases B. Recommendations OnSEC Rule 15c2-12

  17. B. Recommendations OnSEC Rule 15c2-12 3. Consider Structural Change • Possible Solutions • A. Pool Resources • B. Centralize data collection

  18. Hub & Spoke Benefits Create central index and inventory management Derive economies of scale Eliminate redundancy to issuers and NRMSIRs Slash NRMSIR costs Facilitate web access Encourage development of value added services B. Recommendations OnSEC Rule 15c2-12

  19. C. Future Directions inMunicipal Disclosure • New information technology confers vast opportunities to improve disclosure • Removal of barriers should spur increased voluntary initiatives • NABL Sept. 20, 2000 Position Paper on Secondary Market Disclosure • SEC Clarification on Republication(Rel. No. 33-7856 et. seq.)

  20. C. Future Directions inMunicipal Disclosure • Municipal web sites are an ideal vehicle to disseminate investment information • Very inexpensive mass communication medium • Cost-effective management tool • Evenhanded access to information • Emblematic of effective financial information management • Preserves issuer autonomy

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