United States Securities and Exchange Commission
Division of Market Regulation
Office of Municipal Securities

2001 Municipal Market Roundtable
"Secondary Market Disclosure for the 21st Century"

November 14, 2001
New York City

Opening Remarks

Stephen J. Weinstein
Attorney-Fellow
SEC — Office of Municipal Securities

Panel I: NRMSIRs and SIDs

Moderator

Margaret "Peg" Henry
Attorney-Fellow
SEC — Office of Municipal Securities

Panelists

Dan Black
Executive Director
Municipal Advisory Council

Maryrose Carosia
Director of Information Services
Standard & Poor's/J.J. Kenny

Joan Donovan
General Manager, Municipal Data Collection Group
FT Interactive Data

Doug Kemp
Bloomberg Municipal Repository

Peter Schmitt
President
DPC Data, Inc.

Panel II: Continuing Disclosure Under Rule 15c2-12

Moderator

Mary N. Simpkins
Senior Special Counsel
SEC — Office of Municipal Securities

Panelists

Patrick K. Arey
Attorney
Abramoff, Neuberger and Linder LLP

David Boccio
Senior Vice President & General Counsel
New York City Housing Development Corporation

Frank Chin
Managing Director of Public Finance Department
Salomon Smith Barney

Walter K. Knorr
Chief Financial Officer
City of Chicago

Dianne McNabb
Managing Director
A.G. Edwards & Sons, Inc.

Alan Polsky
First Vice President & Director of Research
Dougherty & Company LLC

Relmond P. VanDaniker
Executive Director
National Association of State Auditors, Comptrollers & Treasurers

Leslie Richards-Yellen
Principal
The Vanguard Group

Panel III: Brainstorming Improvements In Secondary Market Disclosure

Moderator

Martha Mahan Haines
Chief
SEC — Office of Municipal Securities

Panelists

Terry Atkinson
Managing Director of the Municipal Securities Group
PaineWebber Inc.

M. Jane Dickey
Partner
Rose Law Firm

Roger L. Davis
Chair of Public Finance
Orrick, Herrington & Sutcliffe, LLP

Robert Estrada
Chairman and CEO
Estrada Hinojosa & Company, Inc.

Frank Hoadley
Director of Capital Finance
Wisconsin Department of Administration

Paul S. Maco
Partner
Vinson & Elkins

Jeffrey Pohl
General Counsel
New York Dormitory Authority

Opening Remarks

Mr. Weinstein

Good morning. Thank you all for coming. We're gratified by the turnout today. It's a beautiful New York morning. It's a beautiful fall morning. I'm not sure what the sign in front of me says, but if it says Peg Henry, that's not me.

My name is Steve Weinstein. It's good to see so many familiar and friendly faces out there. As you know, I'm with the Office of Municipal Securities and we're part of the Division of Market Regulation at the Securities and Exchange Commission. As you're used to hearing, employees of the Commission are required to tell you: Our comments today reflect our own views, which are not necessarily shared by our colleagues on the Securities and Exchange Commission's staff, or by the Commission. Let me save a little bit of time here and make that disclaimer on the part of my colleagues who will speak here later today as well as for myself. I'd like to now launch into a different kind of disclaimer, which gets into what this meeting is all about.

As you know, it seems like the same time last year, plus a month, we were in a room at the Commission's headquarters in Washington. As that Roundtable discussion ended, the subject on everybody's lips and the subject of the closing panelists were the operation of Rule 15c2-12 and the topic of continuing disclosure in the municipal market. In the year that has intervened, as you know from reading the newspapers and seeing us around the country, we have been very interested in following up on the widespread industry interest expressed at that Roundtable on how Rule 15c2-12, as amended — the continuing disclosure requirement — is really working out there. We have been looking at the Repositories. We have been discussing this with all interested parties. I see many sectors represented here this morning — issuers, lawyers, bankers, accountants, and of course investors. We're here this morning to continue that dialogue.

This is primarily a listening operation on our part. The rest of the disclosure is that neither the Division of Market Regulation nor the SEC has a hidden agenda here. We do not have any preordained conclusions, either individually or institutionally. We are here to hear your concerted views on how, some six or seven years after Rule 15c2-12 was amended to include continuing disclosure, is working. We would like you to be forthright, even provocative, as we launch into our three panel discussions today.

We're all old hands in this industry of primary disclosure and it's not only had a dozen years to mature, under Rule 15c2-12, but in fact, it's had 20 or 30 years to mature even before Rule 15c2-12. But the concept of providing information to the secondary market as long as bonds and other municipal securities are out there trading, really is only six or seven years old, as the amendment was drafted and put in place in '94 and '95. We encourage you to let us have your views.

We have three panels here. The first, led by Peg Henry, sitting to my left, will be a series of presentations and discussions by each of the Repositories, the so-called NRMSIRs, I prefer to say repositories, and along with the State Information Depository from the State of Texas, the Municipal Advisory Council. Then we will go into the second panel led by Mary Simpkins, which is a discussion of how things really work and this is where we'd like you to tell us how you see it from your perspective.

We expect active participation from the audience and in that, I guess we're welcoming anything and everything — the good, the bad, the ugly and the beautiful. Is this a system that is working perfectly? Is it a system that needs tinkering? Is it a system that needs to be examined? We don't have a position on this; we're here to listen to your opinions, your advice and your wisdom on the subject.

Then we'll break for a few minutes and we'll have a third panel which Martha Haines, our Office Chief, will lead. That will be what we're calling a brainstorming session, and we'd like that panel and the audience to take into account everything that's happened in the first two sessions and let us have your views, make proposals, make recommendations, feel free to praise what's out there, feel free to criticize it.

We will walk away from here, hopefully, with a very rich book of ideas, and we encourage the audience to also come forth. None of you is shy and the audience should feel free to and jump in at appropriate points. We will welcome questions. I notice from my watch that I've taken up something like seven minutes of the ten minutes that I've been allocated to welcome you, and while I urge everybody here to be provocative and fulsome, I also urge you to follow my model at least in this example. Please stay within your time frames and then we'll all get done before lunch.

So with that, I'd like to turn the proceedings over to my esteemed colleagues, and even more importantly, to all of you who are here with us today. Thanks a lot.

Panel I: NRMSIRs and SIDs

Ms. Henry

Contradictory to Steve's initial remarks, I am Peg Henry, so I can put out the name tag.

We have a good first panel for you. I'm just going to make a couple of introductory remarks, because I know that they have a lot to say. Our existing system of secondary market disclosure is a market-based system of disclosure with a combination of national and state repositories. We have with us representatives of each of the four national repositories, and also a representative of the Texas State Depository to discuss a little bit about how their systems work, but more so how they see the existing system of disclosure, what ideas they have about what things might make sense to change, how we might be able to help with that, not just to talk about what's out there now, but to talk a little bit about those possibilities.

We have with us Peter Schmitt from DPC Data; Maryrose Carosia from Standard & Poor's/J.J. Kenny; Joan Donovan from FT Interactive Data, Doug Kemp from Bloomberg Municipal Repository, and Dan Black from the Municipal Advisory Council of Texas.

We're going to start today with Peter Schmitt from DPC Data. Steve mentioned questions. We welcome your questions. We do certainly have a lot to do with our first panel. We will have index cards available for your questions and if you give them to the person passing them around from our office, she'll bring them up to me and I'll try to fit them in, either during the course of the panel if we have time or towards the end. So with that, let's go to Peter Schmitt.

Mr. Schmitt

Thank you, Peg, and good morning, ladies and gentlemen. I have a PowerPoint presentation that I'll share with you this morning, and I'll go through it rather quickly, but I do have my remarks in a written document that if you come to me after the panel is dismissed I'll be happy to share with you.

A little bit of background on Rule 15c2-12. There's no question about it, there're a lot of competing interests that had to be balanced at the time the revisions to the Rule were brought to life in 1994. Essentially, I think we're here today because we generally agree it created an imperfect system of disclosure in the secondary market.

I would also like to say that I think the amendments to the Rule in 1994 really were heroic testimony to the people who did it and got it done then because they chose to deal with the preposterous state of secondary market disclosure in the 1 point 3 trillion dollar market in municipals in 1994 and really had the determination to make a big improvement.

Of course, as Steve pointed out, these issues were pretty much dealt with and put to bed in the 1930's for corporations, but a similar act wasn't produced in the municipals market until 60 years later.

There are some issuer requirements that are very important that probably are worth enumerating here. First of all, issuers who are subject to Rule 15c2-12 must covenant to make disclosure in the future. Then they actually have to make the disclosures in an ongoing way in the future, and then if any notable event occurs with that issuer or the bond, there are very rigid rules set forth in Rule 15c2-12 for making these releases to the market.

How does the information get to the market? One of the concerns of Rule 15c2-12 is that information the market simultaneously or as close to simultaneously as possible. Why? To preclude the opportunity for insider dealing. Another important concept in the Rule was that this information get to the market without any cost to the Federal Government and also with no additional cost to issuers who must make the filings.

Where the NRMSIRs fit in here, the law saw fit to throw this over to the ingenuity of the free market, free enterprise and essentially, this whole clearing house role is one that is not very clearly defined in the market in Rule 15c2-12. And it's one that besides being thrown to independent companies and interests, they actually carry out. I think there's an expectation that the pressures of competition among repositories would bring about benefits to the market. Of course it was intended to be cost effective for the entire system of disclosure covering all parties.

Here're some procedural flaws we all shared or read about in the market. Inconsistencies among issuers. From a chair inside of an NRMSIR, I can tell you that mostly these inconsistencies are due to issuer/obligor compliance issues. For example, some issuers don't file the materials with every NRMSIR. Some don't file simultaneously with the NRMSIRs. In fact, there are some issuers and obligors out there that don't file any continuing disclosure materials at all.

There are some NRMSIR specific issues that cause inconsistencies. For example, internal organization. A couple of the NRMSIRs are really organized to collect the information from issuers, principally for their internal product or information needs and not necessarily for distribution to the public. And then of course it's a good thing that you can distinguish among NRMSIRs, that some are more proactive than others, that actively reach out to issuers and obligors and even some who are not subject to Rule 15c2-12 to encourage them to file their ongoing disclosures voluntarily with the repository.

Material event notices, we believe we still have the same issuer/obligor compliance issues, but there's also another decision with material event notices. The issuer, filing entity, has the option of filing material event notices with all of the NRMSIRs or with the MSRB. There's a difference. NRMSIR collections are much larger and richer in content than the MSRB collection, because the issuers have not selected the MSRB for filing material event notices in a very significant way. Also one NRMSIR files all material event notices in real-time for free on the Internet while the MSRB charges $23,000 a year for their collection in bulk, and of course we still have NRMSIRs who are proactive in gathering and disseminating material event notices.

We've heard complaints about stale information in repositories. This is a very serious issue, but it's also one not under the control of NRMSIRs, because NRMSIRs have no enforcement role nor do any of the NRMSIRs, certainly the one I work for, have any intention of ever seeking enforcement of the rule. The culprit here seems to be that Rule 15c2-12 does not specify the time frame within which an issuer or obligor subject to the Rule must file its continuing disclosure materials after the close of its fiscal year. Issuers establish those time frames on a bond issue by bond issue basis in the bond covenants.

As example of trying to illustrate to you how obnoxious this is to broker-dealers and investors alike, let's consider the case of an issuer that has a June 30 fiscal year and a covenant to make its continuing disclosures to the market within 270 days following close of its fiscal year, which seems to be a more common covenant these days. That means that this issuer would have to file its fiscal 2000 financial statements by March 27, 2001. Remarkable. That means if anyone buys or sells that bond up through March 26 of 2001, it would have to make do with the June 30, 1999 financials. In other words, staying on the right side of the law may mean and here I mean in regard to nonpublic information may mean having to use stale information.

Another one. Are the NRMSIR archives conveniently available to the entire market? Well, if we look at the rule, it doesn't require or impose any specific technology requirements on any of the repositories. In fact, only one NRMSIR provides its complete disclosure archive on the Web and is available to anyone who visits the Web. Two NRMSIRs provide only paper documents. But I think you can be comforted in knowing that all NRMSIRs do discharge their duties as currently set forth in the rule.

Another one. Consumers must pay NRMSIRs for disclosure information. Hot topic in some forms of the market. It's true that investors in all markets have to pay to acquire some information in the secondary market. The Muni market in this regard may be less than the bond market or more like the asset-backed market and more like the mortgage market. I don't believe a comparison between the muni and corporate markets is a completely valid argument. For example, EDGAR is not free. EDGAR is paid for by the U.S. taxpayers through the operating budget of the Securities and Exchange Commission. One outside interest group remarked and did a study a couple of years ago that said that for the year 1996, they estimated that it cost the SEC approximately $6 million just to run EDGAR.

Of course, in the Muni market the whole cost of collecting, cataloging, indexing, storing and distributing information is really shifted to the NRMSIRs. This is not entirely understood in the market. Like the consumers of the information, broker-dealers, mutual funds, what have you, that are for-profit organizations. NRMSIRs charge for information.

Material event notices are not always provided on a timely basis to investors. Keep in mind the NRMSIRs are only conduits of this information to the market. As the Rule is carried out in this particular part by the NRMSIRs, NRMSIRs are supposed to and generally do make material event notices available on public access systems within 15 minutes of receipt, except in periods of time of unusually high volume.

A week ago Friday we had over 850 material event notices filed with the DPC Data NRMSIR. I guarantee you they did not all make it to our public access system within 15 minutes, but they did all make it by the close of business that day.

Again, simultaneity is an important concept here. If the material event notice content is stale by the time it's presented to the market by the NRMSIRs, it's because it was stale when it was filed with the NRMSIRs. Many panels, the last two panels that dealt with this topic that I participated in, comments were received from both presenters and the audience about how frequently material information is found in the local newspaper sometimes weeks before it winds up in a material event notice that's put through the delivery system set forth by Rule 15c2-12.

Material event notices often lack information critical to investors. Many events that a person would consider reasonably material fall outside of the market because they fall outside of the stringent criteria of Rule 15c2-12. The material event bulk that's available to the market today is more than 85 percent concentrated in bond redemptions and defeasance notices and anyone who needs that information to conduct their business probably does not use an NRMSIR as the source for that information.

What progress has been made under the current disclosure system? Well, for better or for worse, the market now does possess what I like to call a culture of disclosure. After six plus years it's well embedded. We have a huge amount of information available to investors that six plus years ago was not typically available. Look here, for example, at the volume of material event notices that have been filed with the DPC Data NRMSIR since August 1987. That essentially is the date that DPC Data became effectively an NRMSIR.

You can see under the curve here, the area under the curve here certainly is increasing and you can see there's a certain trend of an increase that peaks in receipt of NRMSIRs and publication of material event notices in essentially the quarter ending or quarter beginning slope of bond redemption notices.

Again, for continuing disclosures over the same time period, which takes us up to October 5 of this year. Please just disregard, if you will, the time reference under here. Kind of lost the end right here. You can see we had the same increase in the flow of monthly documents coming into at least the DPC Data NRMSIR and presumably all the NRMSIRs. There is a technology factor to consider, too. The current disclosure system was born in the age of paper documents and paper continues to be the filing medium of choice for issuers and their fiduciaries. At least two of the NRMSIRs execute a technology transition on behalf of issuers by converting all their documents to electronic form so the market can consume them that way.

Issuers, I have a couple of numbers here for you that you might find amusing. For material event notices in all of the year 2000 the DPC Data NRMSIR, 1/2 of one percent came in electronically. 2001, 6/10 of 1 percent so far year to date have been filed electronically, but it looks like issuers and their fiduciaries are finally discovering the fax. You can see the increase.

As for continuing disclosures themselves, out of the 22,600 continuing disclosures that DPC Data NRMSIR received in the month of October, only 242 came in electronically. We're balanced in between here with the consuming group, consumers who are largely institutions on the other side, who have a strong preference for these.

Let me bring this to closure here. Charting the course for a better disclosure system. I think we have to look at things that are probably somewhat immutable here in the near term. One is, of course, we acknowledge that there's a strong need for improvement in the system, but we have to also certainly seriously consider that the Securities and Exchange Commission has no legal authority to regulate municipal bond issues directly except in cases involving fraud.

The constitutional and statutory body of law that guided the entire structure that we're using today was in place in 1994 and probably will be for the indefinite future. I don't sense that there's any political will at the State or Federal level to actually address the issue of whether or not municipal bond issuers should be directly regulated by any single body.

The improvements I think that the market is looking for, and again you have to look for NRMSIRs being in the hot spot here with issuers on one side and all the consumers of the information on the other. We think we have contact with all parties in the market. Everybody wants better compliance by issuers and obligors; wants more timely disclosures, a better rule for reporting material event notices, more access to the disclosure archives maintained by the NRMSIRs and, of course, better use of new information technology. I boiled these down into four specific recommendations that I would make for the system.

First, amend Rule 15c2-12 based on our experience to date. First of all, it would be an interesting and perhaps important thing to consider letting NRMSIRs charge willing issuers for expanded dissemination services, there's already precedent for this in the market, but not for the NRMSIRs. In fact, the current rule specifically forbids NRMSIRs for charging issuers for filing any disclosure materials. If a NRMSIR were paid by an issuer to do expanded dissemination services, it could certainly make these documents available for free to investors and the market participants.

I think the rule probably should provide strict time frames for reporting continuing disclosure materials. A couple of interest groups in the market have already stated that they think 120 to 180 days following the close of the fiscal year would be a good workable time frame. I have an additional thought on that that perhaps 501(c)(3) corporations might better be put under a different time frame reporting requirement more like other corporate time frames.

Replace the strict list of 11 material event notices with a more generalized rule that requires timely notification of NRMSIRs regarding any event that could reasonably affect the trading value of an issuer's or obligor's outstanding bonds.

There are a lot of intelligent people in this business and I think a rule that would state something like if informed judgment of a reasonable person of an event could affect the trading value of outstanding bonds, then that should trigger the filing of a material event notice.

Require NRMSIRs to have public access systems that are Web-based, make them truly available, and then state explicitly in the rule that issuers can satisfy the filing requirements through electronic means.

Number two, step up the enforcement rule.

Number three, enforcement actions involved with Rule 15c2-12 since the amendments in 1994 kind of tokenizes the rule. I've heard on occasion that since there are no real consequences involved, that the rule need not be followed extremely closely. I think that's a tragedy. I think we should encourage the staff of the SEC, certainly the Board itself, to request additional funding from Congress so it can carry out a more vigorous enforcement program.

Third, educate issuers, I think the SEC should take a cue from the GFOA, NFMA, and NABL, who have done a very effective job of reaching out to issuers to inform them not only of their responsibilities under Rule 15c2-12 but also to encourage investor relations and I think it's had some effect. I think it would be appropriate for the SEC to formally reach out to an issuer.

Finally, resolve a latent antitrust issue. NRMSIRs are all information companies that compete with each other, some more vigorously than others, but if somehow this issue could be set aside in a limited way for matters pertaining to collection and dissemination of disclosure information, it would pave the way for better cooperation among all the clearing houses of this operation and perhaps stimulate some cooperation with other interest groups to deal with issues common to issuers investors and dealers.

Thank you again.

Ms. Henry

Thank you very much, Peter, I appreciate your thoughtful and informative remarks. I have a question and a comment or two. You talk about the mandatory requirements of Rule 15c2-12. What has been your experience with issuers making voluntary filings, additional information that's not actually mandated by the Rule?

Mr. Schmitt

It's been better. The year 2001 has really been a watershed year for that. For example, we've noticed that many electric utilities and hospitals are now voluntarily filing quarterly financial statements. We also as we do reach out to issuers, we're finding that in some cases even issuers that have exemptions under the rule are willing to make their materials available to the NRMSIRs, so there is a spirit of cooperation.

Ms. Henry

One thing that we always do try to emphasize to groups that we speak to in an outreach manner is that Rule 15c2-12 is a floor, not a ceiling. You mentioned at one point some of the stringent requirements of Rule 15c2-12 as far as material event notices. Those event notices are meant to be the minimum that should be filed, but we certainly realize that there's a lot of information out there that investors might consider it to be relevant that's not necessarily listed on those eleven events and we do encourage issuers to use the standard of materiality and voluntarily disclose other information that might not necessarily be required by that list. Having said that, I'm going to move to remarks by Doug Kemp of Bloomberg.

Mr. Kemp

Thank you, Peg. Thank you for welcoming us here today. I generally share most of Peter's views, perhaps with few exceptions, but I think his excellent PowerPoint presentation hits most key issues.

I want to divide my remarks today into four parts. First I want to talk a little bit about Bloomberg and its services. I want to reflect a little bit on technology. I want to focus on a few of the key problems and hopefully a solution to those key problems.

First about Bloomberg. Bloomberg was first approved as an NRMSIR in 1990 and was re-designated a NRMSIR in 1995 under the rule amendments. Bloomberg Services provides real-time electronic access 24 hours a day to municipal disclosure documents. We provide them electronically via the Bloomberg software, we provide them by e-mail, fax and also by physical delivery. You can get NRMSIR documents, whether or not you're a terminal software customer, you can be a retail customer and request the documents be faxed to you. We also have additional public access to our software at public libraries, educational institutions and other public venues.

We also provide our news service through other vendors, such as Lexis/Nexis. You can get Bloomberg news and disclosure information on a slightly delayed basis by the next day.

I would kind of like to think of this as is our glass half full or half empty in looking at the Rule and I would like to think that it's half full, that a lot has been achieved under the Rule 15c2-12, and that we should really approach this as looking at our glass as half full and not half empty.

And in preparing for my remarks today, I was thinking about technology and how it's changed, and kind of thinking back to my days in college when I was asked to write a computer program on an IBM 1120 using keypunch cards and after that, I was real happy when I got a desktop calculator and the senior partner of my firm was using a hand crank adding machine, adding up columns of numbers and I was really happy when I had my first 64-bit computer, which I put together from a kit in the early '80s, and when I got my IBM PC and my Compaq 386, all of which are now in the garage somewhere, so we kind of look at the rule here, I think we should look at the rule here in terms of the change in technology and we're looking at a current environment of all the developments that we've had on the Internet, with Bloomberg and other services like Bloomberg, and we may forget that technology is changing around us every minute, and a lot of the rules that are in place right now are in a world where the technology we have today didn't exist.

So in reflecting upon this, I kind of went back to the 1989 original release for Rule 15c2-12, and to take some of the Commission's words, which I'm going to quote here from the 1989 adopting release, "The Commission strongly supports the development of one or more central depositories for municipal disclosure documents. The use of such repositories will substantially increase the availability of information on municipal issuers, and enhance the efficiency of the secondary trading market. The Commission recognizes that benefits may accrue from the creation of competing private repositories."

It's very interesting going back to 1989 that the Commission envisioned that there would be new technology created out of the system and in fact there has been. There are differences among the NRMSIRs, but in totality, the level of disclosure has improved and we have a better system today than we did in 1989 and just to kind of underscore that, in one of the footnotes to the original release, the Commission noted that The Bond Buyer maintains a repository for municipal securities under the name Munifiche, so we've gone from fiche in 1989. We're kind of in awe of all the technology that exists today, but in 1989 we were in a world of fiche, so what we have today is the benefit of kind of the wisdom of the Commission in adopting the rule and allowing private industry to flourish and come up with different solutions.

So I think we should be happy that there is some diversity and some differences in the services that allow private companies to innovate and create new technology.

There is also another footnote to the original adopting release, which I think is very interesting, and I'll read it for you. It says, "The Commission notes that the creation of multiple repositories should be accompanied by the development of an information linkage among the repositories." This never occurred, but it's very interesting in that today the main problem seems to be in the communication between the repositories, and one of the criticisms that I heard in previous public discussions is that not all of the information is available in all the repositories, that someone that needs information may have to contact multiple repositories to get all the information. So what I'm thinking is that part of the solution could perhaps be some form of linkage and it doesn't necessarily have to be a complete amalgamation or central index or something that is a merger of these entities, but some form of communication that could exist between the, among the repositories to improve the level of communication.

I want to focus now on a few of the key problems and some of these Peter already mentioned in his PowerPoint presentation. One of them is certainly the nine-digit CUSIP problem. The nine-digit CUSIP problem is a real problem. Information that NRMSIRs receive comes in all kinds of forms, usually without nine-digit CUSIPs. There's a tremendous amount of work involved in being able to identify specific securities by the nine-digit number. That would be a real improvement for NRMSIRs to have nine-digit CUSIP information.

The other comment that he made that we strongly agree with is the method of delivery. Most of the information we receive is by ordinary mail, it comes from all parts of the country, in all-different time frames. Certainly in the advent of technology, where we were in 1989 with fiche, that we can do certain things to improve the delivery of the information to the NRMSIRs, to the repositories that hold them, and we would be very supportive of any rule changes that would improve that.

And then lastly, to get to the inconsistent disclosure issue, that is a problem, meaning that even if you improve the delivery, you are going to have differences of disclosure when you have competing NRMSIRs providing the information. So in that regard, I would propose kind of a solution that Bloomberg would support.

We would support a central alert-type product which I think would correct the problem, but the problem is not so much that the documents are available from different sources, because there's a tremendous amount of value added work that's being performed by the NRMSIRs. The problem in my mind seems to be that nobody knows what documents have been filed at any given time with any given NRMSIR, so we could create a central alert product that could be made available both on the retail side and the commercial side, while respecting the commercial interests of the NRMSIRs. How would that work? Any NRMSIR would be free to fill this role of basically consolidating all of the collective information that's received by the NRMSIR and providing some sort of a fee that could be available either on the Internet or a commercial product fee to our clients that would alert them of the receipt of various types of information and where you can get it. That would protect the existing business interests of the NRMSIRs and allow provider competition to flourish while still providing the level of disclosure that the marketplace needs.

So I would suggest that as food for thought as the Commission looks at the Rule and some potential changes to it, to perhaps consider going backwards in time, looking at the footnote in terms of linkage issues and looking at that linkage in terms of an alert or notification product, whereby the community could be apprised of material event changes and other forms of disclosure that are available and where you can get them.

Thank you very much.

Ms. Henry

Thank you very much. I would like to clarify the last subject that you raised about the central alert. Am I correct in understanding that you are suggesting that the central alert would in turn have a subscriber base that would pay a fee for access to that information?

Mr. Kemp

I think we envision that there be two levels of service: One would be a commercial service, which could certainly be fee based and we certainly think that there is a lower level of service that could be made available for free to the retail side. There is really no need to charge a retail investor for access to disclosure information about the bonds that he or she may hold, so in that form I think protect both the commercial interests of the NRMSIRs and provide service to the retail side for business.

Ms. Henry

Have you given any thought to what kind of fees we might be talking about here? For example, under the existing system, access to documents at NRMSIRs is available if the person requesting the document is willing to pay a reasonable fee, and in the current marketplace, typically that ranges from $20 to $25 per document.

Now, we would be talking about for at least for certain customers, we would be talking about an additional fee on top of that. Have you given any thought to how much that might be in relationship between that and what's already charged?

Mr. Kemp

No, we really haven't given any thought to the amount of the fee. I think it would be certainly subject to the reasonableness determination of the Commission under the terms of our no action letter, so that any fees that would be charged would be subject to the review of the Commission as to their reasonableness, and we certainly can envision a retail investor trying to access whether or not disclosure information is available, is that something that's either at an extremely limited fee or no fee would certainly be appropriate.

Commercial usage, on the other hand, should be reasonably based, based upon the level and the totality of the service being provided, how it's being provided.

Ms. Henry

You contemplate one entity providing the central alert or would multiple entities be able to engage in that function?

Mr. Kemp

I think this is certainly an issue for debate and consideration. I think any of the NRMSIRs should be allowed to consolidate to provide the information to one another, perhaps upon application to the Commission as we've applied now to be an NRMSIR, by filing a no action letter, that if you choose to provide this function, you would apply to the Commission for the right to do it, set forth how you're going to do it and seek approval for it.

Ms. Henry

Thank you very much for your remarks. You were very helpful.

We're going to move now to Maryrose Carosia from Standard & Poor's/J.J. Kenny for her presentation.

Ms. Carosia

Good morning. It's a pleasure to be here this morning to talk about such an important issue as secondary market disclosure.

My remarks will be from the perspective of both the NRMSIR as well as the vendor. The topics that I'll be covering are looking at the municipal market situation as it is right now, discussing the NRMSIR, what we do in terms of value added processing, talking about information vendors in terms of what we also do in getting that information out to the marketplace, just touch upon the NRMSIR and the rule in terms of the framework, talk a little bit about us, the NRMSIRs as passive repositories and then just offer two recommendations.

In terms of a municipal market situation, there're approximately 50,000 issuers out there. And obligors that may file through the system and generally speaking issuers are not required by securities law to file. And unlike EDGAR, the format and content is not standardized so we receive the majority of the information in paper and facsimile, and also in all different sizes and formats and fonts.

I read recently that some in the market have expressed the perception that the NRMSIR system is a mess. I'm here to dispel that perception and shed some light on the role that the NRMSIRs play and the services that the NRMSIRs provide as national repositories.

The NRMSIRs play an essential role in terms of providing value added processing. Two examples of this value added is we do match the eight-digit CUSIP numbers to the filings and when you think in terms of financial statements, there are thousands of CUSIP numbers that are attached to one particular document. Some financial filings span across many six-digit based CUSIP numbers, so, therefore, that makes the task that much more burdensome.

When you attach a filing or a CUSIP to a filing, you need to attach only the debt that is not exempt from the rule. In order to do that, we as a vendor monitor when the bonds are offered, whether or not the bonds are exempt or aren't exempt from the rule as well as the fiscal year and the expected filing date. And attaching the CUSIP numbers requires really access to a securities database. We need to know if the debt is still outstanding, has it already been called? We need to know if it's a secondary market CUSIP, was there a derivative, what's the relationship to the original CUSIP number? So there's a whole interpretive process that is undertaken when we're attaching CUSIP numbers. It's not just relying on the base CUSIP description.

We also research anonymous filings and yes, this does happen, when provider and submitter is unknown. They are just faxed to us or sent in the mail with no return address. The issuer name is not included in the documents and we don't know to whom the debt belongs. As a NRMSIR we conduct queries by obligors to try to identify the debt and the issuer.

In terms of information vendors, we also play an essential role in providing value added processing. We insure that the information on the material event notices is whole and is accurate and we extract the pertinent data from the filings and provide the data to the marketplace. Basically what we're doing is distilling the NRMSIR material event announcements. We make it more granular, user friendly and machine readable, and as a vendor, we actively procure material event notices. We're not just resting on our laurels as the NRMSIR waiting for submissions to come in, because many of them don't.

The way we go about doing this is making sure we're maintained on the mailing list of fiduciary agents, contacting the marketing agents, trustees, speaking to underwriters on a refunding issue at the time of sale to find out which debt is being pre-refunded and the refunding particulars. That's well in advance of ever receiving an escrow notice.

So the task also involves accessing a securities database, and we take advantage of our Kenny database, where we have all the terms and conditions data, which allow us to run tickler reports off the database. For example, we set up at the time of offering for sinking return bonds, all the sinking fund payments that are going to be made, the dates and the prices. When we run these reports 30 days prior to the sinking fund payment and if we haven't received the notice of material event, we proactively contact the trustee to either validate and obtain the information or receive our best preference, a copy of the material event notice.

There are two examples of how we add value as a vendor in distilling this information.

With respect to material events, we update the CUSIP numbers that are assigned in the secondary market. A lot of these CUSIPs are not on the material event notice simply because the issuer is unaware and the trustee is unaware. In order to be able to do that accurately, we need to be able to access the terms and conditions data that we have as the vendor. We also validate the CUSIP numbers that are provided on the material event itself, because sometimes they are misprinted, so we're able to query by descriptions to make sure that we are actually looking at the correct CUSIP number.

The material events do not always provide complete information. The rule does not dictate a format or a minimum standard for publishing material events so often this requires a proactive stance in terms of contacting the trustee and validating the pre-information is correct. Again, when we look at the material event notice, if we notice that we have updated a bond as pre-refunded to a particular date and the call date on the material event notice is different than that date, that will serve as an indicator that we need to confirm that information and that may be in fact invalid.

At the time the rule was drafted and enacted, the private sector embraced the NRMSIR concept and we bore the burden of the cost and the expense that was associated with it and the rationale was, well, it fit our business model. We as a vendor needed this information, it was required for pricing, trading and our clients were relying on us to deliver that information to them for securities processing purposes as well. Our NRMSIR functions are truly integrated with our research functions as a vendor. The intent of the rule was to improve compliance and improve access to the filings at a reasonable cost and I don't think that anyone can argue that compliance is better today than it was when the rule was first enacted. And a reasonable cost, $20 to $30 a document depending on which NRMSIR you seek the data from and in the format it's reasonable, basically covers our handling cost.

In looking at the rule, I notice that the NRMSIRs were established as passive repositories and what do I mean by that. The rule does not specify whether NRMSIRs should publish a notice of a misfiling when the notice is not provided. The rule does also not provide a mechanism to report misfiling or filings that are weak in content. We had one filing that came in with an MSRB cover sheet, checked off was an escrow notice. When we looked at the document it was one page of the refunding official statement, the refunding section and it did not contain the refunding particulars, so that's a filing that we would characterize as weak in content.

The rule does not specify whether defeased debt is exempt or nonexempt from the rule. I would raise the question is it really necessary to really file financial information when debt is secured by an escrow account backed by 100 percent Treasuries for Government agencies, should the NRMSIRs report these as a misfiling? So there's a lot of interpretive processing, a lot of unanswered questions with respect to processing and I would urge the SEC if they do make a change to the rule that we draw from the vendors' experiences in processing this information.

Two recommendations that I had in going forward: One is to form a disclosure-working group to improve secondary market disclosure. I think that panels like this are wonderful and the SEC and MSRB have outreached to the NRMSIR community, but I think a working group with all industry participants; the MSRB, the SEC, the NRMSIRs, the SIDs as well as the "buy side", the "sell side", the front office and the back office would really help the market and excluding any one participant I don't feel would serve the market well.

I would also recommend including disclosure provisions in the bond indentures and make them so they're not necessarily deal-specific but issuer specific, because that is the covenant that the trustee refers to in terms of notifying the market of material events.

Thank you.

Ms. Henry

Thank you, Maryrose. I just had a couple of quick questions. There's been some discussion among various market participants about the possibility of moving from our current system which, has no requirements regarding electronic transmission to a system where documents and notices might be transmitted to the NRMSIRs on some sort of electronic basis and then made available by the NRMSIRs electronically as well.

Distinguishing now between Standard & Poor's/J.J. Kenny's role as an NRMSIR as compared to its role as a vendor, I believe, is it accurate to say that your NRMSIR function is paper-based at this point?

Ms. Carosia

Yes, it is.

Ms. Henry

Do you have any thoughts on the effect that going to an electronic system might make in the turnaround time that you're able to, deliver documents; first of all, put them into your system when you get them from the issuer and second, turn them around when you get a request from a broker-dealer or investor or current bond holder?

Ms. Carosia

Well, in terms of receiving the information, electronic would be preferred. It would make it a lot easier to accept the information as well as we could turn around the information a lot quicker to the marketplace. However, when we talk about processing and attaching the CUSIP numbers, that process I don't envision changing with electronic delivery, so-

Ms. Henry

Well, what is your experience now when you get, for example, audited financial statements from an issuer. How long does it take you to turn them around so that they are indexed in a manner that you could then make them available to someone inquiring about them?

Ms. Carosia

Well, we try to process them as soon as they come in. Sometimes during peak periods you could get hundreds in a given day. It depends on the size of the issuer. They could have a couple of bond deals that are outstanding or they could have thousands of CUSIPs that are associated with them, so anywhere from, I would say the fifteen minutes during peak period, it could be up to a day or two in terms of turning that around.

Ms. Henry

And then if someone requests, let's say that I'm interested in a particular issue and I want to get a feel for what their financials have been like over the last three years, and I call you and I tell you, I have a CUSIP number for the bond issue, and I ask you for the audited financials for the last three years for this particular, associated with the particular bond issue. How long do you think under your current paper-based system it would take you to be able to turn that around for me?

Ms. Carosia

Let me just step back for one moment to the previous question that you asked. We do log the financial in immediately for the issuer, but in terms of processing to all of the levels, that's what could take a day or two. What we've done at J.J. Kenny is store some of the financials from previous years off site so we could turn that around in a day, but we'd have to pull that from archive.

We have had very little request for old financials and in fact I think the intent of the rule was to provide the most recent audited financial information and operating data and we do keep that on file. But we've never had a request other than from the SEC for an older financial.

Ms. Henry

All right, thank you very much. We're going to turn now to Joan Donovan from FT Interactive Data.

Ms. Donovan

Good morning. FT Interactive Data's role as a company is to provide formatted descriptive data at value added prices to the industry. MuniView, our interactive municipal bond database delivers many municipal products and services that allow customers to receive schedules and real-time data feeds. We have several products that give disclosure data in dedicated real-time file on demand or as a scheduled fee delivery. We also have products that match formatted data with disclosure specific information.

The spirit of disclosure practices is to make material descriptive data immediately available to the industry. It was not created to give the municipal information vendors a commercial or competitive benefit. With this in mind, FT Interactive Data is supportive of efforts to make all submitted disclosure documents widely and consistently available. Truth is, the information vendors do not make a great deal of money in disclosure document dissemination. As Maryrose said, we get very few requests other than the SEC for older financials. With the added costs of developing and maintaining new distribution products and staffing document libraries, it is a costly proposition for the NRMSIRs.

The benefit for us is a systematic source of valuable documentation to feed our traditional data and on-screen products, but there are limitations due to the effectiveness of document collection as an NRMSIR. These limitations are due to the scope of the Rule 15c2-12 regulations and inconsistent document collections.

Because of the current regulatory environment, enforcement targets the dealer community and not directly the issuer community. Issuers are often unaware or confused about their disclosure responsibilities. This is foremost an enforcement issue and belongs in a legal forum, but this is also an information communication problem for the SEC, the MSRB and the issuer community. As a source, the NRMSIR is limited because in the secondary market most outstanding debt does not fall under the Rule 15c2-12 regulations.

To illustrate the scope of this problem there are roughly 25 to 30,000 deals that are subject to Rule 15c2-12 regulations. The entire number of currently outstanding deals in the municipal market is approximately 160,000 deals. This should improve slightly over time as pre '95-'96 deals are refunded or matured. But NRMSIRs will continue to miss out on notices on debt from the smaller issuers, notes, many variable rate deals and the private placement market. This is the result of exemptions listed in the Rule 15c2-12 regulations.

During the last year, the MSRB has been conducting a study comparing various collections of financials and material events collected by the NRMSIRs for a specific time period. We know from the study that there are inconsistencies in timeliness and coverage. The difficult task is identifying the proper obligor of financials from the basic CUSIP number. Most financials are received without a cover sheet, and as Maryrose said are not CUSIPed.

The role of the NRMSIRs is that of repository. Send us financials, notices in any format and we will catalog and disseminate the information. We fully support any effort the MSRB takes to insure equitable distribution of material event notices. The creation of a central index would not only provide the needed standard, but also provide a central link to all available documents for dealers and investors. Issuers are often confused on who or where to send documents.

Although we have sent many mailings and have updated the NRMSIR Web page, we still are forwarding documents from Thomson, which is the former parent company. This situation has definitely affected our timeliness and coverage. The central index may void the inconsistent manner in which documents are delivered to the various NRMSIRs. As stated before, we do not see substantial revenue from the dissemination of disclosure documents. We value the documents for the inherent data included in the notices that feed our respective products.

Thank you.

Ms. Henry

Thank you very much, Joan. I will note that we started a few minutes late, so we're going to try and move along, but I know we have a very interesting presentation from Dan Black from Texas. I know I started out saying that we had when we got together talking about the panel today, talked about the fact that most people--I shouldn't say that, most broker-dealers and investors--are familiar with the workings of the existing four NRMSIRs, so it was really not necessary to get into detail about those details, but more to focus on the possible changes to the system or how the system is working.

That's probably less true in the case of Dan's organization, the Municipal Advisory Council of Texas because as a State information depository it is limited to files with respect to issues in Texas, and I'd say that Dan's system is somewhat unique, and he has prepared a presentation to give you an idea of really what it would be like to use the system that's in place in Texas. Dan?

Mr. Black

Thank you. I got the invitation, I got the introduction of people who, as any good manager, I'm not going to do anything but turn to the people who will do the work. To my right is Laura Slaughter, the Deputy Executive Director who has been with MAC for eighteen years, and Terrence Spencer, Director of Information Technology, has been with the MAC for nine years, and shows a little continuity. They are going to give the presentation.

Ms. Slaughter

Thank you, Dan.

The Municipal Advisory Council is a non-profit trade association, and we have been in the disclosure business since 1954. As you know, financial information on the borrower is one of the essentials of all credit. It's true for individuals and corporations, but it's especially true for local governmental entities, for whose bonds a day-to-day trading market must be maintained.

The MAC's comprehensive financial reporting system was developed to meet this need. We're here today to demonstrate our system, one that has worked well in Texas, and one that can serve as a model for the nation.

As our industry addresses disclosure concerns, we do believe there's a lot to be learned by looking at the MAC system. As you heard from the four NRMSIRs, having a good disclosure system is not just about collecting documents. It goes far beyond that. It's about having a comprehensive database, one that is consistent and easy to access. One that is searchable by CUSIP number or issuer name. One that works with the issuers, filing deadline reminder notices and helping them, answering their questions, and one that everyone can access information on, so that they can make sound financial investment decisions.

We were invited here today to showcase our system and show you what the MAC members have been using for over 47 years.

Mr. Spencer

You heard the expression that everything is bigger in Texas. Well, Texas is a big state; we have over 4,000 governmental entities with outstanding bonds. This year, over a thousand new bonds will be issued in Texas alone. So while Texas is only one of 50 states, we account for almost 10 percent of the debt issued in the country. And that's a lot to get your arms around and we're going to show you how we do it today.

We want to cover three areas. First, we want the talk about our internal software that we use to process all the data that we collect. Second, we want to demonstrate how bond data, summary reports and disclosure documents are disseminated to our website for easy access. And finally, we'll discuss the resources required to operate our current system and give you an estimate of what it might take to do this on a national scale.

Laura is going to start out with our data collection process and show you how we handle all the issuers in Texas and our outstanding bonds.

Ms. Slaughter

We do have a huge amount of data that comes in our door every day and our challenge is to turn that information around, get it back out to the market for broad distribution. So how do we begin this challenge? We start by collecting information on every issuer in the state, and we identify certain features about that issuer, what county does it lie in, what's its population, what's its underlying rating, what type of issuer is it, is it a school, hospital district, a city, a county? And then we start tracking every bond that that issuer has outstanding.

So for every bond, we collect descriptive data such as the title, the dated date, whether it's sold through competitive or negotiated sale, the first coupons date, whether it's insured or not. We collect information about the key participants in that bond issue, who's the financial advisor, the underwriter, the syndicate members, bond counsel, paying agent, trustee. Then we key in every maturity, we key in the coupon and the yield and very important to a searchable database, the CUSIP number.

We have over 175,000 CUSIPs in our database.

We collect information on the put or the call and we have a call database so we can calculate the next call date and price.

We also report what the bonds were issued for, if they were for refunding or building streets or water and sewer system. And a critical feature of our disclosure system is our tickler database. In this tickler database, we record the date that the annual or quarterly filing is due to us. This way we can let issuers know that they have a filing deadline approaching, or we can identify the issuers who have not filed. Other key important things that we key into this tickler database are if a letter of credit is going to expire or if there's an interest rate conversion date approaching.

Another critical feature is our document index. This is where we post all the documents that we receive. We identify what type of document it is, is it an official statement, is it an audit, and is it an annual disclosure filing or a material event notice. We record the date that we received it, and whether it was submitted to us pursuant to Rule 15c2-12. And if we receive it in paper, we scan the document in, so that we can make it available on our website. We still receive probably 75 percent of the documents in paper format, but we strongly prefer electronic format. We're encouraging issuers in Texas to file electronically, and a lot more, they're really starting; we're really seeing a trend moving in that direction which is very, very helpful.

So, as you can see, we have a comprehensive collection of information on the issuer, and their outstanding bonds. Then we start to collect information on the, financial information about the issuer. We collect information on their tax rates, their assessed valuations, their tax collection history, and their sales tax information. We comb through the audits and we extract operating data and fund balances from the audits. We compile overlapping debt statements for every issuer in the state. We track bond elections and the authorized but un-issued debt of all the issuers. We collect top ten taxpayers and top ten employers. And we have a database where we keep track of the finance-connected officials for all the issuers, so that if you do need more information, we've got the name, e-mail, phone number, fax of the issuer available.

So as you can see, we're collecting a lot of information and we put all this information into the Texas municipal report and this is an example of the Texas municipal report that we compile on every issuer, and as soon as we update that report, we send a copy to the issuer, and ask for their comments and feedback on the report, so we try to keep the window of communication, the door of communication open between us and the issuers.

We have six analysts that work on updating over 3,500 reports a year, and that's a pretty big traffic, but we really try to stay on top of all the issuers in Texas by providing this information.

Mr. Spencer

So what Laura just showed you was our internal software that we use to collect all the bond information and process the summary reports, the Texas municipal reports. That's what happens internally, now we send it out to the public.

So we send the bond information, the summary reports and the disclosure documents to our website throughout the day, so that the most current information is available, and we want people to access this information, so let's go to the website and we'll show you how we make all this information available.

But first of all, we make it easy to find information. You can search for information with a nine-digit CUSIP or if you don't have a CUSIP, you can look up most of our information with an issuer name. You can download the summary reports on every issuer in Texas. You can access disclosure documents, audits and official statements, and if you're an issuer, you can verify the documents that you've submitted to us that have been received and posted correctly. So let's take a look at the website. I've already keyed in a nine-digit CUSIP here because I don't keep those off the top of my head. So we're going to click on search here.

This takes you to a description of the bond where you find information like the coupon, the yield, the call information and the ratings. We also have a link to the issue information which takes you to a description of the entire issue, where you can find information like the issue size, the dated date, the first coupon date, the underwriter and the financial advisor, and a list of all the maturities with their CUSIPs which takes you back to a link to maturity specific information.

If you don't have a CUSIP, you want to look information up by an issuer name, let's scroll up here, I want to click on TMR's which stands for Texas Municipal Reports, and I'm going to go to the City of Tyler. So I'll click on cities, you can click on any type of issue you want here, but I'll click on cities and let's type in Tyler here. Okay, what's happening is my scroll lock is on.

Okay, then we'll go to the general obligation report and this takes us to what the people on the outside see of our Texas Municipal Reports, where you can find information like the financial statement, the top ten taxpayers, overlapping debt statements, tax data. And from here we have a link to the issuer's website so if you want to go to the website and find more information, as well as the documents on file.

Here we categorize the documents depending on what type they are, is it a disclosure document, is it an audit, an escrow agreement or a final official statement, and from here if we have the document on file, you can download the document.

One complaint that we've heard from issuers is that they don't have access to the NRMSIRs and the SIDs databases, so the way we've addressed that, or let me show you how we've addressed that. I'll go to the SID link and go to SID documents and let's pretend I'm the director of finance for the City of Tyler. Once again I'll click on cities and click on T, let's scroll down this time. And then the general obligation, so here I can see that what documents the MAC has received and I can see that my disclosure filings have been received and posted properly for the past four years.

Other information on our website, we have quite a bit; time doesn't permit us to show it all. We've got recent material events, we have the Rule 15c2-12 filing cover sheet and instructions, we've got a bond calendar, and we have a sales result area where you can see sales results. All the publications that the MAC produces are on line as well. And we have the ability to search for bond information by rating, by maturity or coupon and quite a bit of other information.

So that's a pretty quick overview of our system, so let's get to the $64,000 question. What resources does it take for the MAC to run this disclosure system?

Well, we have fifteen people employed at the MAC. Seventy-Five percent of those people are dedicated to this disclosure system. As Laura said, we've got six financial analysts that create the summary reports; we have two people, two financial analysts that key in all of the bond data. As far as the technical area goes, another programmer and I write all the software, we've created this website and we maintain it on a daily basis, and Laura contributes some analysis and design and all of the business logic associated with all of these systems, so it's a pretty small staff for the amount of data that we crank out.

So with those numbers we kind of estimate that it would take between 50 and 75 people to provide a similar service for the entire nation, depending on the scope of the mission.

In closing, I want to share a couple of comments that we seem to get no matter where we go. We're hearing these from financial advisers, underwriters and rating agencies, just like, "if we only had the data that the Texas MAC did," or "it's so much easier to do a deal in Texas because of the MAC's resources." Well, the foresight that the broker-dealer community showed back in 1954 proved to be invaluable to the Texas bond community, and as an industry, we don't have to reinvent the wheel. We hope that the MAC can be a model for our national disclosure system, and we'd like to thank the SEC for giving us the opportunity today to show our system.

Thank you.

Ms. Henry

Thank you very much.

I just wanted to ask you one question, a couple of questions here. Is all the material that you've demonstrated to us available to any person, investor who is interested in accessing this information?

Ms. Slaughter

The information that's on our website is available to our members and our subscribers, and the information as far as a paper document, anyone can call and request a paper document or if they would prefer a document to be emailed we can do that as well, but as far as direct access to our website, you have to either be a member or a subscriber.

Ms. Henry

And your members are?

Ms. Slaughter

The broker-dealer community in Texas.

Ms. Henry

If I wanted to become a subscriber, how much would that cost me?

Ms. Slaughter

It's $150 a month.

Ms. Henry

And if I wanted paper copies, does the system, does that system work basically the same as you understand-

Ms. Slaughter

I think it's pretty similar. You would just call up and say I need a paper copy and we would get you one.

Mr. Spencer

They could just print it from the website.

Ms. Henry

But assuming I'm not a subscriber.

Mr. Spencer

I see.

Ms. Henry

Okay. And you make extensive use of CUSIP numbers in your system. Do you have an arrangement with CUSIP as far as use of your database and the availability?

Mr. Spencer

Yes.

Ms. Henry

Okay, well, we don't really have time for extensive questions, but I would just like to comment on a couple of these cards that I've received here. A number of them are more comments than they are questions, and I think it's somewhat enlightening, I think people are ready to move on to the next panel, because a lot of these questions suggest that they'd like to talk not so much about the process by which information is being available, but, I'll quote, consistency and reliability of the information that's submitted in the first place, and that several of them focus on that subject.

I'm not sure that's so much the subject of the panel that we're just completing, but the next two panels, especially perhaps the--well both of the next two panels I think are going to focus on that subject.

I want to thank all of you once again for coming in, very helpful and enlightening presentations.

Thank you very much.

(Applause.)

Panel II: Current Situation — Continuing Disclosure Under Rule 15c2-12

Ms. Simpkins

Welcome to the second panel on municipal securities. We want to get started, because we're already running late.

This panel is a discussion of the benefits and drawbacks of the current continuing disclosure system. We have a very knowledgeable panel here, representatives of the "buy side", broker-dealer and underwriting firms, as well as issuers and a bond lawyer. We do have one change from the program that you have and that is that David Boccio, also from the New York City Housing Development Corporation, will be replacing Chuck Brass.

I'm Mary Simpkins from the Office of Municipal Securities. I've been at the Commission about four years after being in private practice for about fifteen years.

I'm going to let each of our panelists introduce themselves very briefly so you know who they are. Let's start at that end with Relmond.

Mr. Vandaniker

My name is Relmond VanDaniker. I'm the Executive Director of the National Association of State Auditors, Controllers and Treasurers. This is the organization of the state fiscal people, roughly 150 members, because there are a couple of states that have more than one auditor/controller/treasurer. We have 75 members who are statewide elected. That is the largest group of statewide elected officials outside the United States Senate, so they are familiar with the political process. It's just a little different group.

Mr. Polsky

My name is Alan Polsky. I am a First Vice President at Dougherty & Company in Minneapolis. I'm the current Chair of the National Association of Municipal Analysts.

Ms. McNabb

I'm Dianne McNabb with A.G. Edwards. I'm just a plain old investment banker out in the field working every day and disclosure has always been one of my primary interests. I'm a CPA by training and find that to be interesting.

Ms. Richards-Yellen

I'm Leslie Richards-Yellen. I'm Counsel for Vanguard's Fixed Income Group and in that capacity I see many unusual municipal issues and many usual municipal issues. I'm also a member of the ICI Fixed Income Committee.

Mr. Arey

I'm Patrick Arey, a Partner in Abramoff, Neuberger and Linder of Baltimore, Maryland. I'm also past Chair of the State and Local Government Bar Association.

Mr. Boccio

I am David Boccio. I am the General Counsel of the New York City Housing Development Corporation. We are an issuer here in New York City.

Mr. Chin

Frank Chin, Managing Director for Salomon Smith Barney, but I'm appearing here today as Vice Chairman of the Municipal Division of TBMA.

Mr. Knorr

I'm Walter Knorr. I'm the Chief Financial Officer of the City of Chicago, something I've been doing for about thirteen years. We are an issuer of municipal bonds.

Ms. Simpkins

I want to give each of our panelists an opportunity to make a general statement about what the current drawbacks and benefits are of the current system. Why don't we start with our "buy side" representatives?

Let's start with Leslie.

Ms. Richards-Yellen

Well, I just want to first thank the SEC for inviting the "buy side" here. This has been such a great process; I think that everyone here, most of us here are in agreement that things can change for the better for everyone. I'm taking a note from Peter Schmitt, although I don't know who drafted the word first, but I think this is an evolutionary process. If you want to think back to Fantasia, we're the fish poking our head out of the ocean and I think the question is how are we going to evolve? The "buy side" hopes we evolve for something that's good for all of us.

I guess from my perspective what I'd like to see change the most is the inclusion of securities that have been carved out of Rule 15c2-12. I would like securities such as money market securities to be within the ambit of Rule 15c2-12. In addition, I'd like to see the eleven material events be expanded. The first eleven were very helpful. The ICI drafted a letter and we've added another twelve for the industry to think about and cogitate on.

We'd like to get interim financial data and we'd like to talk about the mechanics of a disclosure system. We have a lot of ideas. We'd like the information to be centralized, we'd like it to be free to the "buy side", we'd like it to be CUSIP driven so that eleven material events and financial information are there by CUSIP and we'd like it to be voluntary.

We know Rule 15c2-12 did a wonderful job of setting a floor and now we want to evolve past the floor.

Mr. Polsky

I want to have the pleasure of reiterating several of Leslie's comments, one a point of clarification, that the National Federation of Municipal Analysts is clearly strongly represented by the "buy side" of investors, primarily mutual funds and insurance companies, but we really represent the entire analytical community and that includes myself. I work in a "sell side" firm, just another investment banker out on the road and insurance companies, rating agencies, financial advisers and so I think in that capacity we do have a unique perspective.

I'd also like to thank the SEC for these discussions. I'd also like to thank the MSRB and all the trade associations that are represented here and have been on countless panels over the last several years because we really have seen significant improvement. That's been just simply because we're meeting here today and because it seems like we're meeting almost a couple of times a month at this point to talk about disclosure and acknowledging that we have made progress. Absolutely Rule 15c2-12 did make some improvements to the marketplace, but I think everybody in this room agrees we still have places to go.

I won't go into a lot of detail about what the NFMA is. I've given you an overview about our constituency. We have been strong proponents of voluntary practices, of voluntary disclosure. We several years ago started disseminating what we called recommended best practices in disclosure. Those are voluntary guidelines represent the timely flow of accurate information from issuer or borrower to investors, or to users of that information and to date we've issued papers in the housing sector, land secured, hospitals, higher education, we are just finishing up a draft in general obligations and we just issued a draft in long term care and a final paper on solid waste and we're working currently on papers in the tax increment finance area in short-term and variable rate.

That's a long list. I expect it to get longer over time. That's a credit to the market and all the participants in the market.

One of the problems I think we struggle with is that every sector requires a different disclosure regime and we have to acknowledge that if we're going to make progress. Looking at a hospital credit is nothing like looking at a general obligation credit which is nothing like looking at a university, which is nothing like looking at a nursing home. So that has to be incorporated into it.

A lot of the information that Leslie mentioned, it needs to be more frequent than annual. Peter raised an excellent point when he said that an analyst might be looking at information that's, now my math is failing me, but it's almost, let's see, 21 months, I think would be roughly how old information could be. When you are an analyst in a mutual fund or when you are an analyst in a broker-dealer and you're making a decision on buying or selling a security, that information is just plain too stale and it's not acceptable, and I don't think that anybody would agree you could make informed decisions based on that information. Particularly in troubled sectors as well like hospitals have been and like long term care, where you need current operating data and most importantly, you also need current utilization data.

The problems with the NRMSIRs. The NRMSIRs have provided an excellent service in the marketplace. I think that the dissemination of information generally, the availability of official statements is good. Again, I think if you compare the kind of information and we try to set a gold standard, that's for better or worse, the information that analysts really need to do their job in the most efficient manner isn't available under Rule 15c2-12.

It is a minimum, as was stated on the last panel, and we would like to see a market based resolution or remedy which includes a lot more voluntary information.

Specifically, timeliness, I touched on that. Cost is a factor. I know that it's troubling. I polled several of our constituents, some of those at very large mutual fund companies, about the NRMSIR system in preparation for this meeting, and quite frankly, they say that they don't use the NRMSIRs unless they absolutely have to. They think that specifically, to give an example, to spend $5 or $10 million or to invest $5 or $10 million in a particular security and then have to pay $20 or something like that to get information on an ongoing basis which may be incomplete or stale just isn't supportable.

I do fully understand that somebody's got to pay for it, but it is clear that all of my constituents would agree that it shouldn't be the analysts.

I touched on lack of operating utilization. The last thing I'll mention is CUSIPs. I mean, I think that is a very solvable issue. CUSIPs are generally not available; I think it runs to a lot of the misfiling that's going on at the NRMSIRs. It just seems that generally, we need to raise awareness. I would love to personally, I'd love to see CUSIP numbers, I know there are some issues around that, but I think the industry should look at that. That's what drives everything that all the analysts use, that's how everybody's records are set up, and I think it's great if the market could get to that same sort of regime.

Ms. Simpkins

Before I leave the "buy side", since Peg said there were a lot of questions in the first panel about the quality of information from the NRMSIRs, let's talk about that just a little bit more.

Do you use more than one NRMSIR? Do you use other sources and do you find that the different NRMSIRs have different information or different material event notices and do you have general comments, I mean, you mentioned stale information, but other comments about maybe that are more directed at the NRMSIRs themselves?

Mr. Polsky

Most people do use more than one NRMSIR. Everybody will use whatever remedies they have. Typically, depending on the information, if you're looking for an OS or something like that, then I think that a lot of people's first thoughts would be to go to the NRMSIRs. If you're looking for operating data, if you're looking for specific information, then what most analysts are likely to do is go directly to the borrower or issuer themselves and ask for the information.

That sort of comes into an issue that we've tried to develop in our recommended best practices and that is really two-fold, that a lot of the information could be Web-based on the issuers' websites and also if issuers had identified investor relations individuals, I'm not suggesting that all organizations need to necessarily hire a new person to handle those responsibilities, but if they identified somebody that there was a consistent message and the focus person from the market, I think you'd find that that would bring more efficiency.

So people do, to summarize your question, people do use more than one, but it's with mixed results.

Ms. Simpkins

Let's move on to our broker-dealer/underwriter panelists. Let's start with Dianne. Just give us a general overview about your view of the current system.

Ms. McNabb

I think as an investment banker we get kind of pulled from both sides, because we're working directly with the issuer, who has this obligation that they need to fulfill, and at the same time, we have our own analysts and investors that want more information, and so we're getting pulled both ways.

I know that the industry I think relies a lot on bond ratings and on insurance, especially from the retail side. The retail investor and the retail broker, I think, relies heavily on that. How much they actually utilize data available at the NRMSIRs beyond that, I know that we rely very heavily on the material event notices in determining the valuation of bonds.

I think generally issuers have adapted fairly well to these requirements. They're accustomed to having requirements; they kind of work it into their system. Frequent issuers I work with seem to have it pretty well in hand and seem to be complying with their requirements. The less frequent issuers are the ones we're most apt to see not complying with their requirements and of course we don't, because investment banking is very transaction oriented and not cyclical, we don't find out about that until the next time we want to underwrite bonds.

And I think, too, again, being pulled from both sides, I think that the investment banking community in an effort, obviously, we don't make money if people don't issue bonds, and generally, if they don't issue them publicly, through a public offering, I think that the industry tends to gloss over the requirements with the issuers, especially the smaller issuers, the ones that are going to have the most difficulty fulfilling those requirements.

I think that there is a great deal of the "Come in the door, oh, don't worry about it, I'll take care of everything, you just give us your bank account number and we'll make a deposit when it's all over." And that way issuers come away, I think, not really understanding the implication of the obligations that they've committed to.

The requirement that we have a reasonable basis to believe that these issuers are going to comply with the undertakings that they've signed on to, of course, we have no idea how many times, how many strikes do they get before we have to tell them, oh, well, now you've, this is it, we can't underwrite your bonds anymore.

I think it would be nice to have some guidance on that, not only would it help us in what we're doing, but it would also help the issuers understand the implications of their filing or failing to file.

I think one example of maybe part of the breakdown, the cover sheet that has been mentioned. I've never seen that cover sheet, and certainly I'm working directly with the issuers, and there's a cover sheet that's supposed to go on this disclosure, and I guess had.

I known about that, I would have been more than happy to pass that along to them and had them use it.

I think that any changes that are made in the continuing disclosure arena that increases or causes an issuer to think twice before they issue bonds, and go the old fashioned way when they used to just go down the street to their local bank, that's going to be resisted, I think, by at least the investment banking community, because, of course, that means that, again, people won't be issuing bonds publicly.

Now, I don't know that they can really, we have this fear that they'll go back to going to their local banks to borrow money. Whether that is a sound fear, I don't know, because certainly there are very few local banks anymore, and with the size of the market, where it is now, I'm not sure that there is capacity within the local banks to absorb all the debt, but I do think that they'll resist anything that is going to cause people to not want to issue bonds publicly.

One solution could be to make the requirements broader. I think that the involvement of independent auditors, and granted I'm probably prejudiced because of my prior life, but certainly they work in a cycle, an annual cycle, and I think that insuring that they understand that these issuers have entered into an obligation and are supposed to be filing annually, and if they are not involved in that annual filing, they at least audit for the compliance, I think that would probably help improve an issuer's compliance with their obligation.

The AICPA publishes an industry audit guide for governmental entities. There's no reason something like that couldn't be included in an industry audit guide.

The timing of the financial statements, I would agree, financial statements that are 18 to 21 months old are pretty worthless. And there's no reason that they can't be done sooner. Again, you're going to hear a lot of screaming, wailing and gnashing of teeth, because if to issue debt in a public market, if the issuer has to obligate themselves to have audited financial statements published within a more reasonable amount of time, say 120 days, then of course they're likely to say, well, forget that, we'll just go to the local bank and borrow our money, because we don't want to have to produce our audited financial statements in that amount of time.

I think that in summary, we could use more specificity as far as what needs to be disclosed, the timeliness of that disclosure, such as the financial statements, more events, I think that we would agree that there are more events. I think I'd like to, we would like to see them divided into two categories of types of events.

You've got the calls and redemptions and all of those things that you potentially need not be bothered with and then I think we would also like to see everything done on a more electronic basis. It's very time consuming to download documents that have been scanned in versus electronically filed documents that can be downloaded very quickly. We do use the information, and I'd love to see it improved, but with the caveat that we've got to avoid chasing issuers out of the market.

Ms. Simpkins

I know Frank has some general comments.

Mr. Chin

My comments are really more from the perspective of TBMA and the municipal stuff we're doing. Generally speaking, I think, and clearly the importance of capital markets are clear to everyone. The growth for most municipalities is really from borrowed, not entirely from generated funds, so the continued efficiency and effectiveness of the capital markets I think is critical for the ongoing health of the country and the cities, states and localities.

Because of that, TBMA's position is good disclosure is important for everyone; it's necessary for that process and that we need to do things that improve the disclosure process. Our general observations would be that the primary market seems to be working actually very well, that most of the focus has been on the secondary market in terms of the information available.

The other issue I think we all have to deal with is that the issuer base is clearly very diverse. We have large sophisticated issuers who are always in the market, like Walter and also some just do not come to the market very often, so I think we have to be cognizant of that fact. I think if you look at what TBMA's view position would be, I think what we view as the intermediaries in this process, as Dianne pointed out, that I think our job is to create vehicles, structures to really facilitate the timely transmission of important information in a cost effective manner.

With that in mind, TBMA has created a secondary market task force to really focus on issues of disclosure and we really have it broken down into four subcommittees, which will give you some sense of at least our kind of view of the relevant parts of the disclosure program.

One is indicative data, one is on regulatory issues, and the third is on the issuer side the fourth is on NRMSIRs. I think what we are trying to do with other initiatives, TBMA particularly in the taxable market is to set certain standards, protocols, information transmission vehicles that people know what information we would like to see about securities, the form that information is transmitted and so that communication can be facilitated, because while the municipal market employs a very large segment, taxable markets and general capital markets are even larger. There are lessons that we learned from other parts of our businesses that could be transferred into the municipal marketplace, but the simplest one is just to identify what a bond is, what its characteristics are and the information that should be associated with that.

So we think some of the efforts on the task force should be helpful to establish basic ground rules for the participants in the marketplace to understand how information should be exchanged or could be exchanged most efficiently. That's really our primary focus right now.

Ms. Simpkins

Dianne mentioned, and it's always been the Commission's view, that a broker-dealer making a recommendation implies by its recommendation that it has a reasonable basis for that recommendation. Also, Rule 15c2-12 requires that the broker-dealer have procedures in place to be able to review material event notices. What exactly do broker-dealers do in order to satisfy their Rule 15c2-12 recommendation obligations?

Ms. McNabb

In our system, when we pull up a security to consider buying it and selling it, before we trade a security, our system automatically flags any securities by CUSIP for which we've received material event notices. So we know automatically, and of course then we evaluate what that material event is, if it requires additional research, it goes back to research, and does impact our pricing.

Ms. Simpkins

So they do review that information?

Ms. McNabb

Absolutely, they have — yes.

Ms. Simpkins

Okay. Let's move on to the issuers. Let's start with Walter Knorr; you've heard some general comments about the current system.

Mr. Knorr

Thank you for the opportunity. Ultimately in Chicago I think with continuing disclosure we want to do what we believe is right. We don't believe that per se continuing disclosure will reduce borrowing costs, but it certainly doesn't hurt.

Chicago, of course, is a regular issuer, a continual issuer of bonds, general obligation bonds, revenue bonds for water, sewer and airports, toll road, taxable financings, and take on the responsibility for continuing disclosure with all of those and are a regular provider of the information to the four main NRMSIRs on a regular basis. In that we are continual issuers, we constantly are updating information that we put out with regard to our new issues and have that information readily available.

I don't have any problem with the electronic filing of information, as long as it doesn't contradict any of the written formats, how it's formatted, how it will be formatted, to make sure that that's in place, so I have no problem with electronic filing. An editorial comment is that I would concur with the GFOA's position that maybe that another source is basically individual entity websites, issuers websites, be a source or an opportunity to provide for continuing disclosure information on websites that are already available out there, with some just some guidelines with regard to the requirements as far as updating the information as well as making sure that it is not commingled with other types of information that's on the website, public relations type of information, et cetera, so it's distinct that's what it's made available for.

In the City of Chicago we have a built in infrastructure for purposes of continuous disclosure. Part of our debt management we would have this as something that's done on a routinized basis to provide the continuing disclosure. I think that we do have a pretty good reputation for being, for our disclosures with our filings as well as with our brethren in Chicago with regard to their individual offerings.

The City itself on its website, it puts its audited financial statements on its website, some other selected information, but quite honestly we don't have many hits, maybe it's just not exciting enough, but we don't have, we don't see we have a lot of people going to our audited financial information.

There's been a lot of talk about additional information with regard to quarterly filings, quarterly information. I wouldn't have any particular problem with putting some information with regard to cash flow, that's a standard published document of the City of Chicago, basically on projections, cash flow projections, make that available, it's a publicly available document now, making that available and constantly updating cash flow. Going to full accrual quarterly financials is probably something that's fundamentally difficult for us when it comes to doing a reasonable job of accruing revenues of the City because of the delays in the actual receipts of the cash flows, making sure that even if they're unaudited to make sure that there's some accuracy involved in those quarterly financials, they're a good depiction.

Ultimately, when I get back to saying we want to do what's right, that's what we ultimately do, particularly with regard to material events, essentially use it and use our conscience as our guide, materiality as our guide, what is a material event and go through the analysis if something does happen that we need to focus on.

The last thing I would say is basically we are a conduit issuer. We don't involve ourselves in a lot of unrated bonds being issued through the City of Chicago or any of our sister agencies. We certainly don't take on, if we're conduit issuers we don't take on any contractual obligation for continuing disclosure with our conduit issuers, but knowing some of our bigger ones are publicly held companies that basically have responsibilities for continuing disclosure to accommodate 10-K's, 10-Q's in their regular filings. Some of them are smaller issue, industrial development bonds in the public markets, basically that they're all either credit supported, letter of credit supported, that those written responsibilities are there.

So particularly with regard to conduit issues, that's where we stand.

Ms. Simpkins

You mentioned that you're a conduit issuer. What steps do you take, if any, to make sure that your conduit borrowers are complying with their undertakings?

Mr. Knorr

Particularly, if there's any response back, we would certainly be aware of any of the big ones, utilities, airlines, anyone that's not making a filing we become aware of. Some of the smaller issue IDB's if there are any, basically call them letters of credit that support, or any of the, if there's insurance, any credit supported, we call on that.

That's something we could be aware of. If I become aware of, I certainly feel it's my responsibility to pass along the information. If something else happened, I believe that's a responsibility, even if I haven't taken on a contractual obligation, but otherwise we stay away from what we call unrated unenhanced conduit issues.

Ms. Simpkins

Okay, David Boccio, your general comments.

Mr. Boccio

We are more like a conduit issuer ourselves. When we do a lot of issues, there are only a few of them that are really subject to continuing disclosure, so in certain ways, we feel some sort of kinship to some of the smaller issuers that just don't have these responsibilities on a regular, ongoing basis.

So let me give you a flavor of some of the issues and problems from the issuer perspective that comes up from time to time.

On our conduit borrowings, the corporation itself enters into the continuing disclosure agreement and then we have to go to the borrowers to obtain the materials. There's an issue in getting the information in a timely fashion from the borrower. We've also talked a little bit today about whether it can be filed electronically, the material that I'm getting from some of the conduit borrowers, maybe their financial statements, maybe insurance certificates regarding housing projects and the like, that's not going to come in electronic form today. It is scannable, we can pass it on in that format, but it's not easy to put together.

One of our issues or issues similar, for similar issuers is the dedication of in-house personnel to meet the continuing disclosure requirements. Probably because of the infrequency of this you need to have a somewhat senior person that has to monitor and is responsible for having somebody compile the material. There's always a risk in that situation, as there may be with issuers that are governmental issuers, if there's a change in staff, if there's a change in administration and the continuity is sometimes broken and there's just a risk of something falling away in that instance.

We've had one or two material events, notices that we have had to file, and our experience is that, we actually did a test, we went back to the repositories a year later and wanted to find the information that we had filed by the issuer name. After realizing we couldn't get in ourselves and went through one of our underwriters, it turned out that three of the four repositories had no record whatsoever that they could find for us as evidence of what we had filed. I won't mention the one that did have the record, but the mayor elect will be happy to hear about that.

So what does that mean for timely filing by electronic means or fax or whatever or is it a safer practice that I send a certified letter now with my material events or annual filing to make sure that at least on our end we have some sort of record that it's actually got to the right place.

We're happy to comply with continuing disclosure. This is needed, it's what the industry is today, but perhaps a more revolutionary question is really what is truly needed. We know what the information is today that we have to put out there, but is that what is really important to the industry. I'm not sure I know that a lot of times on the buying and selling of securities. If a block of bonds comes on to the market, no one is going to a NRMSIR on that, from the calls we're getting. We're getting calls they want to know specific information that is much more timely to them.

One comment on some of the excluded securities. We issue a lot of short-term putable obligations that are credit enhanced. Do you really want to know a lot of information about these type of, you know, the projects that you really want to know that Fannie Mae or Freddie Mac or a letter of credit bank is supporting these securities and on seven days notice you can have your money back, but where is the value? It's not an obligation we have now. Is that going to be truly useful information for somebody?

Ms. Richards-Yellen

Yes.

Mr. Boccio

And why?

Ms. Richards-Yellen

All right, I'll tell you why. My, what I hope more than anything is that variable rate demand obligations become within the Rule 15c2-12 disclosure regime and to answer your question, if you could try to put yourself in the position of a fund, we have on one hand Rule 15c2-12, which is very helpful and it sets the floor of what kind of information must be delivered for a secondary market, the eleven material events, the financial statements, and so that's what we have.

But on the other hand, mutual funds are bound by Rule 2(a)7 and that says for short-term obligations what we must find for every security, and Rule 2(a)7 has legal requirements that we must fulfill in order to buy the securities, and I'm not going to bore you, but I'll mention a few of them, and to make these findings we have to make our own determination, we can't rely on rating agencies, we do this all in house.

We have to figure out from the get-go whether the security has, meets minimal credit risk determination, so that's an intangible, there's no checklist that says you got to check in, this and this, it's the analysts groping with the issuer and the facts at hand trying to figure out if they can write a report saying this is why this is money market eligible.

This is an ongoing determination, it's not just made the second we buy it, we have to continually make that determination and we need information to make that determination. When securities are downgraded or if there's a fact that happens, we have to say does this continue to meet minimal credit risk determination. If not, then we have to take it to our board of directors and it either has to be sold at that predetermined practicable or we hold it.

Finally, we have diversification requirements, so if it's a letter of credit from X bank when it's issued and it changes five years later to Y bank, maybe we already have too much of Y bank, and without knowing that it's Y bank we're in trouble because we're not meeting our diversification requirements.

Finally, we monitor conditions so if what you have on the security is not a, it's a conditional put, it's not unconditional, we have to determine that each of the features that say, you know, the liquidity goes away following five things happening, we have to constantly monitor those five things. If you put yourselves in the fund's position, how are you going to do that if you do not have information, volunteer information, because as of now, these securities are within the regime of Rule 15c2-12, but we have people whose entire jobs it is to call people up and to get this information.

So I hope that answers your question.

Mr. Boccio

It does in part. The question is, if you have these obligations right now, what do you otherwise do to fulfill them. It's a separate discussion, but it really goes to I guess the point that I was trying to make of what is the really critical information that's needed and who should be providing this information to the marketplace at what time, and those are the questions that I think in thinking about the entire area from a broad perspective should really be answered.

Ms. Simpkins

Since we're running short of time, let's go back to our issuers and give Relmond VanDaniker an opportunity to talk about the current system.

Mr. Vandaniker

Thank you very much. I appreciate the SEC inviting us here. Basically, what I'm here today to talk about is something that for some of you going back into '89, '90, '91 is a repeat performance, because I will call your attention to footnote number 158 of Rule 15c2-12, which was a suggestion that NASAC made and the reason I told you what NASAC, who NASAC is, NASAC was willing at that time, and I believe it's still willing to work with the market to attempt to be concerned about the other 50,000 issuers out there. And the substantial noncompliance that we hear, and how do you begin to address that issue?

I don't know if you know, but 45 to 46 states have central collection points through either the auditor, the controller or the treasurer for information. Now, this information is not being generated for secondary market disclosure necessarily. The Texas MAC is a wonderful example and that's our hero. The Ohio has started a MAC, Michigan has a MAC. What we suggested way back when Rule 15c2-12 was being suggested is that we would work with the states to begin to develop more SIDs, because it doesn't seem to us that standing at the top of a pile saying that everybody's going to send this in is actually going to work. I think you're going to have to go down and work with the folks and we were willing through the auditors, controllers and treasurers to work with the folks to begin to develop the SIDs.

But what we asked for was that if we did do this, and the State did it, that that would be the only place that an issuer had to send the information, because the issuers don't have any, the smaller issuers have no great attachment to the NRMSIRs or to anybody else, the MSRB, but they would have it to the office of the local governments that exist, to the State Auditor Office, Ohio MAC is run through the State Auditor's Office, and so it is possible, we believe, to begin to work with the market to get the kind of compliance that's necessary, for all the discussion that we have is about information. If you don't get the information in the first place, a lot of this becomes academic discussion, and so how do we begin to approach and improve the noncompliance factor?

And I don't believe it's that these issuers don't want to comply, it's the fact that for smaller issues, I mean, you got finance managers that may be part time that last a year or two, then they're gone. We got somebody else coming in, they don't remember anything about any of these requirements, and maybe over the course of ten years you run through three or four finance managers. I think you've heard New York and Chicago talk about their presentation, well, we've got to look at the rest of this in terms of the noncompliance, and I would hate to see that the noncompliance and the enforcement come through some type of federal regulation, because I think that would be vigorously opposed.

But I do think in working with the states through the collection offices that already exist, that in fact we can begin to improve the compliance.

The problems that we had before were that, one; I couldn't get the SEC to say that the State SID would be the only place that had to go. At that point in time the NRMSIRs were in their formative stages and nobody knew exactly how this was going to work. Well, we suggested at that time that if you didn't do this, the compliance wouldn't be great. Well, I ask you, is the compliance great now? We're now ten years down stream. How much has really changed.

There is obviously improvement. Do you want to wait another fifteen or twenty years for more improvement or do you want to begin to perhaps take a different tack in terms of how to get the information, then we can talk about the various types of disclosures that are necessary. Nobody said this would be easy.

One of the other things was cost. If in fact the states don't have to take this on, why should they take it on, if in fact there's going to be cost. But how much cost are we talking about? Five million? Ten million? Fifteen million? They're big numbers. How much money's been wasted already in terms of the disclosure or the lack of disclosure? So if I told you it was $10 million, would that, I mean, could we come up with the $10 million if in fact we would begin to work with the states in terms of coming up with the compliance issues, that in fact the states would be--they're not necessarily going to jump up and down to take this responsibility on, but if the cost was reduced that they didn't have to pay for the additional cost in doing this, then perhaps they would be willing to do this. Then they would be getting in.

It's not politically desirable, we're not interested as a state, folks, putting these additional requirements on, but the states are interested in the proper functioning of the bond market, so in terms of facilitating the bond market for all of the folks out there, including the smaller issues, then there may be some willingness to do this.

But I do believe that it would have to be a requirement that if the issuers sent the information to a SID, that would be the only place that they'd have to send it.

Now, so we have fifty repositories instead of one. How do you get from fifty-to-one? Well, can you begin to now, going back to 1991, technology wasn't there, somebody mentioned we were talking about microfiche.

Well, now we're not back into that state, we're into computers. So now can we begin to have an entity begin to pull all this together, and in essence have tentacles out to all fifty states to pull the information in, in whatever form, because most of it is still going to be paper, as has been reported here. Most of these smaller governments are not going to be able to do this electronically. They're worried about GASB 34 with the implementation there, but in terms of making some of these changes, they may be able to move more electronically.

We'd have an entity pulling this together and then the NRMSIRs can do their value added part, the analysts can do the analysis, there can be a mechanism, then, for the dissemination of what is or what are the requirements necessary to gather this. But it seems to me that until one sits down and looks at this in a different light, in terms of looking at this from the bottom up instead of the top down, that we are still going to wind up with substantial noncompliance, and I don't think any of our members are interested in having any of the local governments within their jurisdiction being hit upside the head with a two-by-four for this noncompliance and in many cases they don't know exactly what's going on.

So I think it might be time to go back to a suggestion that was made back in the early '90s of thinking in terms of the SIDs and following the example that we had with Texas and following the example of Ohio, and it would not be a piece of cake, but this would be a different approach and I believe that the noncompliance will be substantially reduced.

Ms. Simpkins

Last but not least, we have a bond lawyer representative on our panel, so Pat Arey, how is the system working from a bond lawyer's perspective?

Mr. Arey

Well, first of all, I would say that in many respects it works well. We are much further down the road than we were ten years ago. I think you ought to look at the positive a little bit. It has been mentioned a few times here that there's a wide diversity of issuers out there in terms of market segments, whether you're in health care, life care, just a conduit issuer, are you a GO issuer of revenue bonds, there's diversity there.

One I'm going to spend a few minutes on is diversity in size. My practice has pretty much been in Virginia and Maryland and we have some big issuers there, but I think we also have an amount of small, smaller and smallest type issues. Those are the people I generally represent, the issuers, and some thoughts on that and how the system is working for them.

I first would say, these are good people, they want to do the right thing, they want to disclose. And I'm talking really about the finance professionals here, they want to do the right thing, but they're heavily reliant on advisers, whether financial advisers, underwriters or the bond counsel or their in-house lawyers. They're basically home grown experts. We've been at this for, well, all of my career we've been worried about disclosure but on continuing disclosure we've been focusing on it for four, five, years even before the amendments to Rule 15c2-12 were adopted. They're home grown experts.

There are really not a lot of guidebooks to follow in here.

I think one of the keys there is education. If anything were to come out of here with these finance professionals on the issuers, again, focusing on what I would say the midsize to smaller issuers, both in amount of bonds outstanding and frequency of issues, if we were to say anything, it's educate, educate, educate.

This is a great opportunity; I really appreciate what the Commission has done here, because what's becoming more and more aware to me is we need to talk together across a spectrum. Too often at my experience, lawyers like to talk to one another. We're very good at that, and we do care a lot, we're trying to understand, but it's only relatively recently that I'm beginning to hear, and the "buy side" is perhaps becoming more vocal. I think that's real important, we ought to know our markets.

One issuer asked a question with one thing all bond lawyers love, the responding to requests for proposals, said what would you do to change our official statement, and after thinking a lot, I had a lot of suggestions for it, and I said, "My first comment to you as issuer is 'nothing.' Before you talk about changing your official statement, go talk to the people who buy your bonds. Talk to the underwriters who sell them, talk to the analysts and the funds that buy them. What do they want to know? You don't want to completely redo your document and then rush out and say, 'hey, market, look what we do,' and everybody says, 'huh?' You've just completely restructured, you've missed a few boats, now we have a new document to learn."

Very counterproductive in the market, in my estimation. So we need to talk to each other, that's tremendously important here and understand what the issues are. It may mean the analysts would like to see a lot of stuff, they don't get everything, but certainly talking will make it better as we understand what it is people need.

I think we have to keep in mind in this range of issuers that resources are limited. In my experience, we've got some from Maryland, very big issuers, but you're talking about two, maybe three people who are involved in the process, and you're talking about issuers who finance is not their business, they're in the education business. They're in the health care business, they're in a lot of other things, and financing is simply a means to an end. Very important and needs to be done correctly, but it is not the basic thing they do. They're in the business of education or health care, not in the business of finance, that's why they rely on us as their advisers.

I think technology, we've talked a lot about electronic transmission, everything, I think that is the wave of the future and we've got to get much better at it, but I think it is still quite a challenge, again, from my perspective. We've got, a lot of issuers worked very hard and they've put together good documents, but if you actually look at them electronically, they're a word processing disaster that looks great on paper, it's not the most efficient, and I only say this is because as we proceed to filing electronically, my experience is we go with PDF. That's where I'm experienced, and yes, you can push the print button, it will change it from PDF, but if you have a bad document structurally from a word processing viewpoint structurally, it changes it to a bad format, whether you're changing from WordPerfect to Word or from Word to PDF, you have to be careful there when you're doing the direct conversions.

I think that's why a lot of the financial printers, we're always now getting the official statement in PDF. I think they basically do a scanning and take a picture of it, we have the comfort, we know what's on the paper, now we know that's faithfully been reproduced and I think that's important to the market and important to the issuers for the comfort level.

The only other thing is I would say we get criticized on this from time to time is that some counsel do advise their clients only to do the bare minimum to get by. I had a recent experience where a large firm representing an underwriter said, "Well, we're just going to file with the MSRB because that's all the rule requires."

I said, "But you're missing the point of this. You get it to the NRMSIRs, they're available, that's the key thing about this whole thing."

And the answer was, "Well, we don't have to do it. We're doing the minimum, we're complying with the law, that's all we have to do." So I'll kind of pass this on.

If you ask me one suggestion I would give to change this, if you're going to file, you file with everybody. It's just a simple, I don't think it's going to cost more and it's necessary to make this work, rather than having the market look for other systems, whether it's a single NRMSIR or whatever, that we're going to come down with a tougher, more difficult compliance regime, so let's try to make what we have work.

On the other hand, we do get criticized. One of my questions here to talk about was the NABL paper, did it help, I think the recent NABL paper on disclosure helped quite a bit. Does it make everybody happy, say you can do everything? No, it's a careful, thoughtful analysis and, frankly, I think that's what we, as lawyers have to do to continually counsel our clients. Yes, we want to see good disclosure, continuing disclosure and material events notices, but when you're dealing with a notice out in the marketplace when you know that what you have to say has a direct impact on the pricing of bonds in the secondary market, the issuer ought to be extremely careful. We can't afford to be making the problem worse or creating greater damage, so that's why we have to be very careful in what we say. We have to check and double check and triple check everything we've said so we know it's accurate, which is meeting the market's needs and we talked a little bit about timeliness, yes, that takes time to figure that out, but I think most people want to do the right thing, they're out there trying to do it, and we're just working our way ahead.

I think the future is bright, I think sessions like this and the recent number of us here, it's almost like a routine from the group that met at the MSRB that has now decided to call itself the Muni Council, and the great thing about this is people across the industry began talking to each other, sharing the concerns and sharing where they'd like this market to go and that's incredibly positive and together we're going to move forward in some way, shape or form, and I think we'll get further down the road, it may not be perfect from some people's perspective but we'll all be a lot better off.

Ms. Simpkins

We've gotten a number of interesting comments and questions, but unfortunately, we don't have time to go into that today, but we will keep these cards and I would like to also point out you're free to write us or call us.

The telephone number of our office is 202-942-7300, so please call us with your questions or comments. We will keep these cards. Since we are running a little late, we'll probably take a truncated break here, about ten minutes, so I'd like to thank all of the panels and panelists and we'll see you back here in about ten minutes.

(Applause.)

(Brief recess.)

Panel III — Brainstorming Improvements in Secondary Market Disclosure

Ms. Haines

First of all, I want not only to reiterate our standard disclaimer, but also expand it. This panel is intended to be controversial. We intend to have a wide-ranging discussion. Not only is the Commission not proposing or advocating anything at this Roundtable, neither are the participants on this panel. I have asked them to play devil's advocate; just to throw out ideas so that we can consider them and discuss a range of possibilities. So please don't take what any of us are saying as being representative of the positions of any organization we're associated with.

Secondary market information is necessary for a number of reasons, and we've talked about some of them today. The most obvious is that investors in the market, both institutional and retail, need to make decisions whether to buy or sell securities and at what price. They need to obtain information to make those decisions, either directly or indirectly. Indirectly many investors currently obtain that information through their broker or through information vendors, including through some of the information vendors' systems that you heard about on the NRMSIR panel today.

Brokers have responsibilities for which they need information. In determining whether to recommend a security to a particular customer, brokers need information to form a reasonable basis for making a recommendation. Brokers also need information to determine the suitability of a particular investment for a particular customer.

On the last panel, you heard Leslie talk about the rules that affect investment companies and their need to stay in compliance with certain regulatory requirements on funds' investments. I'm sure most of you either have or have had at some point a money market fund. Do you remember receiving statements with values updated daily? How do can an investment company determine a daily value if they lack adequate the pricing information?

If you look back only a few years, the municipal market was completely paper based and secondary market disclosure was a brand new idea. Now the Internet is everywhere, many municipal issuers have websites, and electronic trading has appeared on the scene. This dramatic change necessitates that we review how the NRMSIR system is actually working, with an eye towards the future and what changing conditions it may face.

Please keep in mind the dual audiences for this information. There are the broker-dealers on one hand and there are the investors, both retail and institutional on the other.

We need to remember that making information available to one of those sectors does not necessarily mean it's available to the other. This is particularly true in the case of the retail investors who generally have little access to information about municipal securities other than from brokers.

Finally, I would like to remind you about the limits of the SEC's authority. We have no authority to regulate issuers of municipal securities. We do have antifraud enforcement power, but that is only useful after a fraud. We can only regulate municipal disclosure indirectly through broker-dealers. You can be sure that we have no interest in expanding that authority.

There is no hidden agenda today. This is simply a fact-finding exercise. We need industry input in order to evaluate how the current NRMSIR — based secondary market disclosure system is working. I want to thank all of you for coming today to provide that information. I encourage each of you, if you have any suggestions, to call, write, or e-mail us. We want more input; the more input the better.

I think I'd like to ask the panelists to introduce themselves briefly and then, instead of having each person initially make a presentation, we're going to launch right into a discussion.

Mr. Pohl

I'm Jeff Pohl. I'm General Counsel to the New York Dormitory Authority. Despite our name, which is limited, obviously we're a conduit issuer for a lot of public and private entities in the State of New York, but also more important and I guess for this discussion, a variety of not for profits, colleges, hospitals nursing homes and the like.

Mr. Maco

I'm Paul Maco. I'm head of the public finance and securities regulatory practice of the Washington office of Vincent & Elkins.

Mr. Estrada

Robert Estrada with the firm of Estrada Hinojosa & Company in Dallas, Texas. We're a registered broker-dealer, NASD broker-dealer and previously served on the MSRB.

Mr. Hoadley

I'm Frank Hoadley. I'm the Director of Capital Finance for the State of Wisconsin. We have been very active in promoting Web-based disclosure and have done a few things with our site that are still not generally accepted, but we think are useful examples.

Nowhere close to what Dan Black is doing, but nevertheless, we think there are ways that disclosure problems can be surmounted through issuers' websites.

Mr. Atkinson

I'm Terry Atkinson. Head of the Municipal Securities Group at UBS PaineWebber.

Mr. Davis

Roger Davis. I am a bond lawyer and Chair of the finance department of Orrick, Herrington & Sutcliffe.

Ms. Dickey

My name is Jane Dickey. I am a bond lawyer and partner in the Rose Law Firm in Little Rock. I'm a former president of NABL. That's my professional life.

In my civic life, I'm about to become an issuer, actually. I'm the Chair of a local water board in central Arkansas.

Ms. Haines

Let's talk first about how to fix the current NRMSIR system, not throw it away or replace it. What can we do to fix it? I'll start with an easy one. What do you think about requiring a cover sheet that would include CUSIPs? What are the issues that go with that, and what other information would you want on that cover sheet?

My own suggestion is an issuer contact name and phone number. Paul?

Mr. Maco

Martha, I think CUSIPs seem to be one of the standards in the marketplace; it is the standard in the marketplace really for identifying securities in a trading format. Why not in a disclosure context as well? It seems eminently sensible to do that. There are cover sheets that have been made available incorporating use of CUSIPs by The Bond Market Association and by the MSRB, available on websites.

The difficulty seems to be an industry awareness problem of the access and utility of these cover sheets. I think one minor suggestion for any future cover sheet that's based on those two models, which I think are very good models, and that's to the extent that there's a provision for voluntary information, I think the current phrase used is "other material event", and the Commission recognized when it adopted Regulation FD in its final form that there was a lot of nervousness in the corporate market about using Form 8K to file disclosures in order to comply with FD because of concerns that the filings would be deemed material and then that would create a look back and trigger all sorts of fears by filers about creating liabilities for themselves.

So I would suggest any future form drop the word "material" so as not to discourage the voluntary filing of information by issuers.

Mr. Hoadley

If I could perhaps jump in on the CUSIP issue, I think one of the large problems with issuers using CUSIPs in identifying disclosure information is access to CUSIP information. Unless the issuer has retained and has right at their fingertips, the CUSIP information that was contained in their closing document, they probably don't know the CUSIPs on their outstanding bonds. Did you ever try to find out the CUSIP on one of your own bonds? Well, let's see, CUSIP Service Bureau, that's a good place to start go on their website. You go there, find you have to have a user name to log in and somebody is going to charge you a whole lot of money to access the information that's in there.

Okay, if I'm an issuer out there getting ready to file a disclosure report and I can't access the CUSIP number, well, guess what, I'm not going to put it on there.

Mr. Davis

Let me try to address both issues, if I can. I think we can go past cover sheets and require that all filings in order to be effective contain CUSIP numbers. We have to have some locater number as a method for filing bonds, because if you're looking for, if you're holding a certificate of participation, an undivided portion interest, at least between the Redevelopment Agency of the City of Oakland and the City of Oakland, you really have a problem in trying to find the information through any of the current systems. You have to have CUSIP numbers. It is a problem that once the closing is over there may not be a closing document with a CUSIP number in it, and if there is, finding it is a considerable undertaking.

Mr. Hoadley

Or the CUSIPs may have changed or changed more than once.

Mr. Davis

I think if we had a regime in which we filed a form like the IRS 8038 form at the time shortly after closing, which form contained the name of the bonds, the issuer, what the CUSIP number is at that point, which is the point in time the issuer does have access to the CUSIP, who the obligated parties are, what the time period is for the filing of annual reports and on a voluntary basis who could be contacted for further information and whether or not there's a website from which the information can be obtained, where on that website you would look, then you have a foundation in which a lot of other things can occur.

CUSIP numbers do change, but in the age of computers you have a conversion table to enable anybody who has any of the CUSIP numbers in the history stream of a bond to convert back, it shouldn't be an undue problem if we can get to the bottom of cooperation on CUSIP.

Ms. Haines

I met with some senior people at the CUSIP Company yesterday and they confirmed that they have absolutely no problem with issuers printing CUSIP numbers on the cover of their official statements or using it in any filing that they make throughout the life of a bond issue.

Mr. Atkinson

If I could follow up on that from an underwriter's standpoint. If we're going to improve the system, in my opinion, at least one of the keys has to be the CUSIP, as Martha said.

And there are ways to get those numbers, et cetera. If it's as you said, that's helpful. You are right, CUSIP numbers do change, and that if I insure bonds in the secondary market, the CUSIP number will change, if you refund the bonds, it will change as well.

I think it's something that's doable if we work closely with the CUSIP Bureau to get more help with them going forward.

Ms. Haines

Frank already prints the CUSIP numbers on the cover page of his official statement. Another practice would be to slap a copy of the cover page of the official statements to which a filing relates on top of the filings. Then it would be very clear and all of the CUSIP numbers and other information would be correct.

Ms. Dickey

I think that would be helpful, but I also really like Roger's idea about having a cover page that is filed with the official statement that is filed when bonds are issued, and particularly if it has the CUSIP numbers and contact information. I believe that one of the other things that might help the system is if we added to the notice events that have to be filed in the future, any change in contact information or any change in CUSIP. That could help the flow of information throughout the life of a bond issue.

Mr. Maco

I'd observe that if the practice of putting CUSIP numbers on the cover of official statements is universally adopted, then there will be one source, the MSRB and the MSIL system for G-36 filings, the issue will be effective integration of the G-36 MSIL library with other databases available to the marketplace. And you could take any number of ways in approaching that goal.

Mr. Davis

There are some practical problems with obtaining CUSIP numbers at the time that you're producing the official statement. Particularly if you want to get it as quickly as possible after the sale.

Ms. Haines

I was just handed a note stating that The Bond Market Association is currently working on a master index of bond issues in order that people can find CUSIPs more easily and follow them throughout the life of a bond issue. Apparently, that's an ongoing TBMA project right now.

What about a requirement that all filings be electronic? I'd especially like from the broker-dealers here to talk about the impact on the smaller, less frequent issuers. Jeff, maybe you could start talking on the part of big issuers?

Mr. Pohl

Again, on the mechanics, the way we approach our continuing disclosure agreement ourselves, it's usually among the obligor, ourselves and the trustee. We require the obligor to give the information to us and we're required to turn it over to the NRMSIRs. We do the same with the material events.

I guess we could gear up, but we would have the capability to do it now. I guess from that perspective we could handle it. I don't know beyond that because I'm not on the process side. I know how our CPA's work.

Ms. Haines

I'm not a technical person at all on this, but it seems to me it could be something as simple as an e-mail attachment.

Mr. Estrada

I can tell you from my experience at our firm as a broker-dealer, as a financial advisor, and as a recovering bond lawyer, I've seen it from all sides for the issuer. We represent a lot of small issuers, but no matter how small and unsophisticated an issuer is in our client base, every deal has a bond lawyer. In our state, virtually every deal has a financial advisor too. So I think if we institutionalize a process of reporting, that, as Terry suggested, it got to be routine to file an AV38 on appropriate transactions, it got to be routine to file no arbitrage certificates at some point and it's so easy to add one more thing to the checklist that already includes dozens of documents for a closing. Mo matter how small, how infrequent an issuer may be, there's going to be a responsible party at the closing table that should be able to comply with a uniform system.

Mr. Hoadley

Back to the suggestion that it would be a requirement of all filings be electronic. I think the underlying problem is the assumption that the documents were prepared and are available in electronic form to file. If the document has only been provided to the issuer in paper form, then you're stuck with paper images, which everybody agrees are not very efficient.

Ms. Haines

Can they be provided electronically if requested?

Mr. Hoadley

Even in our position we have to be very diligent in extracting electronic versions of disclosure documents from people.

Mr. Atkinson

I don't know if you can actually mandate it, but I would say we ought to do everything with all the parties to encourage it. Certainly the technology is there. All of us are doing more and more stuff electronically. The technology is there.

I spoke to some of the smaller issuers. They have more of a problem because they don't have the manpower to get this done. I think we should encourage it. If we want to move this thing forward, we need a lot more electronic filing.

Mr. Davis

We've got to get their attention.

I think we may need to phase it in. The biggest problem I see are the financial statements, which are almost always delivered in paper form. Counsel is very resistant to providing it in electronic form, which can make a perfect conversion possible.

Mr. Hoadley

In that regard, we found, as you develop contracts, you make it a contractual provision that the documents will be provided in an electronic form suitable for posting on a website or for disclosure.

Mr. Davis

If we phase in, we can do that.

Ms. Haines

Don't reporting companies already turn their financial statements into an electronic format because electronic filings on EDGAR are required now?

Ms. Dickey

State auditors may not have that same capacity nor willingness to change.

Mr. Estrada

Going back to the importance of the initial filing on closing of an issue, once you've got the basic information on any bonds that are issued and outstanding and you've got a system, we create a system for the country like what was demonstrated by the Municipal Advisory Council where they've got a tickler filing that sends out notices that advises everybody in that database when they have a requirement and as part of the initial filing, you set up a tickler system that notifies not just the issuer but also the bond counsel, and the financial advisor, so you've got some redundancy built in there and I think it could very quickly solve those issues.

Ms. Haines

You're suggesting the NRMSIR set up ticklers for those items?

Mr. Estrada

For whatever system is created.

Mr. Hoadley

I like the idea you gave, that's the original filing of the name of the issue, the name of the issuer, the associated CUSIPs, and the responsible person for providing information about that issue. It's my observation that in Wisconsin, that seems to be the largest single problem we see in disclosure. It's not infrequent in my office that we get a telephone call from a bond analyst somewhere around the country who is plaintively looking for contact information for the Sanitary District of East Overshoe, Wisconsin, and we unfortunately have to tell him we have no idea who they are or where they are.

It seems to me very basic to today's market, that there needs to be instant and immediate access to identify who an issuer is and who the responsible party for that issue is.

Ms. Haines

Let me bring up another perhaps hotter topic and that is content. One of the issues mentioned by speakers on the other panels was, although there may be some difficulty with issuer compliance by smaller issuers of GO's and traditional bonds, there is serious noncompliance from conduit borrowers. Should we have a different standard for conduit borrowers? The conduit area is where most of the defaults occur and most of the financially troubled bond issues are found.

Who do you think? Should we have the same standards or different standards for conduit bonds?

Mr. Davis

Certainly shouldn't have any lesser standards. I think part of the problem is that we hear information about noncompliance, but we're unable to quantify it. We haven't consistently been able to do that. If we had a sort of Form 8038 as a base, we would be able to have a tickler system and identify the problem.

Mr. Davis

I think if they were reminded — the problem with the conduit borrowers, they come in to borrow money, and they really didn't understand a thing about what they witnessed during the bond issue. They're delighted that it's over and they really don't recognize the responsibilities that they may have to bond-owners, much less remember something like continuing disclosure which they'll have a year, a year and a half later. They need to be reminded and there's no universal system for that reminder to take place. If the NRMSIRs should undertake that, and they were given appropriate compliance information to enable them to do so, that might help out a great deal.

Mr. Pohl

We at the Dorm, the way we approach our continuing disclosure, I think we can help on the procedure side. We require that they give us the information. We monitor it and who gives it. We undertake to tell those that don't file.

But we can't go to the market to tell us what the nature of that information should be. We've done some quarterly reporting in the health care side because the market has required it. We typically don't do it in the context of the CDA, but in the context of the loan agreement so we can change it and have a little bit more flexibility.

I want to go back to whether we can require it. With some of our smaller borrowers, it's all we can do to get them to give the information and if we tell them and our auditors who are not frequent issuers to give it to us in electronic form, that won't work in the real world. It's one thing to say we're going to try to get it, another thing to follow up on it.

Ms. Haines

Perhaps one could find a way to make it worth their while to try to file electronically? It's one possibility. What do you think about having different reporting schedules?

Mr. Atkinson

I think your real problem is generally not with the largest issuers. With the State of Wisconsin or City of New York or City of Chicago, ongoing disclosure is well taken care of. The ones that are harder to attract, IDB borrowers, multi-family stuff. Fortunately, I don't do a lot of that.

I'll go with what you just said when you do it, getting the information the first time is difficult and they kind of have a tendency to disappear. You may or may not have an ongoing relationship.

Ms. Haines

I think there are two really very difficult questions in this area. The first one is enforcement and the second one is who's going to pay for it. When I say enforcement, I don't mean to imply SEC enforcement, just inducing a higher level of compliance.

I had one tax attorney suggest to me that a NRMSIR or the SEC or somebody come up with a

"blacklist" like the IRS used in the past, or at least theoretically had the ability to use in the past, for issuers whose arbitrage certificates could not be relied upon.

Mr. Davis

What would be the effect of blacklisting?

Ms. Haines

I don't know. I think it was more of an embarrassment factor that this person had in mind. Remember, continuing disclosure undertaking is not a contract with the Commission. It's a contract for the benefit of the ultimate investors.

Mr. Davis

I don't want to step on toes you told me not to step on to begin with, but you could create a list and enforce it.

Ms. Haines

My ground rules were no change of law would be required.

Mr. Davis

Without changing the law, it would at least be theoretically possible, I can research this, to have the undertaking by the issuer acknowledge the SEC or some other party as a third party beneficiary entitled to enforce.

Ms. Haines

Interesting. Jane?

Ms. Dickey

I mean, I thought about the blacklist idea, too. It was certainly ineffective for the IRS, so while a blacklist theoretically sounds like a good idea, the practical experience of the government would not lead me to believe that it would have any effect. I suppose what it would be, though, is that the SEC would say that this is an issuer whose assurances that will comply and has complied in the past are false, and an investor could bring enforcement actions for the issuer making false statements about failure to comply in the past. But that scenario always you get a free bite of the apple, because it would never affect a first issuance of bonds subject to Rule 15c2-12, it would only come into effect the next time they issued bonds that were subject to Rule 15c2-12, so I don't think that's a very practical solution.

Ms. Haines

Any other ideas?

Mr. Maco

Martha, I think listening to people this morning and other panels at other times, I keep hearing the need for clarity and certainty, particularly from the broker-dealer side. Clarity in terms of just what the rules require them to do and not to do. If you look at the language contained in the adopting releases, "tentative" is, in some respects, a generous adjective.

But if you think back to the time and, the fashioning of the compromise, you can understand why, perhaps, some tentative nature is there.

Certainly clarity, just what is it we're expected to do and how are we supposed to do it, and certainty; certainty in terms of the ability to underwrite a security or to recommend a security without the expenditure of a significant amount of money in terms of back office support, that sort of thing. And this carries through to really the "buy side" as well and their interest, certainty as to the compliance, the accuracy, the availability, the timeliness of data and whether the information available to them is comprehensive.

So clarity and certainty are two things that I think really run through this, and perhaps the Commission might be in a better position now that time has passed to, rather than come up with something totally new, just ratchet the screws a little bit more to help all segments of the market.

Mr. Estrada

Spoken like a former enforcer.

Ms. Haines

I think the glass is really much more than half full at this point. If you've been in the industry as long as I have and you look back twenty years ago to what passed as an official statement and then look at a current official statement and Rule 15c2-12 filings today, it's a breathtaking improvement.

Ms. Dickey

Martha, I want to key off of something that Paul said about clarity. If we had clarity about what had to be filed and when it was due...you know, in Rule 15c2-12, municipal securities dealers and broker-dealers, must have procedures in place to provide reasonable assurance that they will receive prompt notice of event disclosure filings. There's nothing in Rule 15c2-12 that says that these entities have to have procedures in place to receive annual disclosure.

Ms. Haines

That was part of the compromise made between the proposing and adopting releases in 1994.

Ms. Dickey

If in fact these broker-dealers had to have the procedures in place to receive annual disclosure, then they would be in a position to have a red flag such a that filing has not been made, and maybe the broker-dealer community could help serve as a warning signal that disclosure wasn't being made as required in the rule; not the content, but just the fact of the filing.

Ms. Haines

The fact that it's overdue.

What about the exemptions? You heard Leslie talking about the exemption for VDRBs that can be put; her suggestion was that exemption should be eliminated. Others say if the investor doesn't want to hold a VDRB, they can put it at any time.

On the other hand, during the period that at a money market fund holds a security, it has to be valued every day. The Funds need information to do that. What do the broker-dealers in particular think about that?

Mr. Estrada

I don't think right now the focal point is exemptions. I think we've got our hands full trying to create an ideal system or near ideal system for what already is covered by the rule, and I would say the industry really needs to stay focused on that, rather than looking beyond what has been exempted and shouldn't be or what should be happening.

Mr. Atkinson

I haven't seen any real pressure prior to today, actually, on any of the communities running exemptions, either the short-term community or VRDO's.

Today is the first time I heard that and it's probably worth taking it into consideration. Usually I get direct phone calls if somebody thinks we ought to be doing something differently, but it's probably worth taking a look at. Assuming that you're representing not only bankers, but some of the other investors.

Mr. Maco

I think it's worth noting that at a minimum, awareness of the point at which the two rules diverge is important, so a proper business judgment can be made by issuers who may perceive they are in effect excluding a significant portion of the potential purchasers for securities they may bring to market, because they don't meet Rule 2(a)7 standards. Giving issuers an opportunity to voluntarily meet those needs, it is certainly one possibility, and that can be accomplished really by increasing the understanding of bond counsel about how the two rules operate, where the gaps are, and opportunities should the issuer client so decide to go after that market or, say, for other reasons. Even though we may be targeting these particular funds in theory, there are other considerations that pull me away from that.

And then aside from that, of course, it's entirely within your province as regulators as to the degree to which you can abide inconsistency and different regulatory regimes.

Ms. Haines

Earlier today there was a discussion of either having a central index of some kind or a central repository. I'd like each of you, to take a turn addressing the issues that come up under those two possibilities, keeping in mind that we don't want to break what we have that's working, such as the flow of information coming from the current NRMSIRs to various information vendors who put it on their systems, which are widely used by institutional investors and by broker-dealers.

Jane, what do you think about a central repository? One of the things that the GFOA has suggested is that issuer websites be used instead of a central system.

Ms. Dickey

I'd leave the NRMSIR system in place. I believe an issuer in its initial filing could list its website as an additional source of information, but I don't see that the NRMSIR system is one that needs to be significantly overhauled. I believe if we had CUSIPs at the beginning of an issue and CUSIPs on event notices, that it would go a long way to solving the problems that have been articulated today.

Mr. Atkinson

Could I take the other side of that?

Ms. Haines

Sure.

Mr. Atkinson

I'd be more on the side of definitely moving towards a single repository. That doesn't necessarily supplant all the NRMSIRs. Here's why. Basically, if you have a single source, you have ease of access, basically one-stop shopping. A single repository would serve as a source of information for all the industry, including the vendors, so you have vendors, industry participants like ourselves, issuers, regulatory folks, have-one stop shopping.

Then the NRMSIRs and other people will do what they've been doing, take that information, do value added trading, so they can distribute it and get compensated. I think if you have one-stop shopping, you have a lot of this alleviated.

Mr. Estrada

I would piggyback on that. I echo what Terry says and I think, I go one step further and say in my opinion the MSRB is an idea central collector of the standardized form or cover sheet that we're talking about. Have the MSRB at least be the central point for collecting the information, the basic information on every new issue of bonds that's put into the market and then let perhaps each state develop or duplicate what Texas has done or Ohio has done or have a central website somewhere in the country that builds on that basic data that the MSRB can enforce and collect just like they required in G-36 and that's worked beautifully, and it be relatively small cost issue for the MSRB, I think. And as Terry said, have the NRMSIRs or other potential providers out there of information add their value, add their formatting or whatever the case may be to what that centralized system provides, but I think that's ultimately the key answer, especially for the investor community is to be able to go one place and get the basic information and then go shopping from there to where they want some service that adds value to that.

Ms. Haines

Frank, what do you think?

Mr. Hoadley

I think the current regime is neither a carrot nor a stick. There is no enforcement and there is no real incentive on the positive side to require disclosure. And while Bob's describing the advantages of a central system, I think absent the carrot or stick, and absent a major change in the law or regulation, it's not going to happen.

I think the GFOA approach at this point, and I just want to mention a couple of things of what GFOA is talking about, the debt fiscal policy committee headed by Allen Anders is now working on developing a recommended practice regarding the use of websites for disclosure. Now, that recommended practice is under development and it's going to be debated, and I assume it's probably going to be surpassed in some form in the near future, but Allen and others working on this are also recognizing that simply putting out a recommended practice doesn't necessarily change anything, and so along with this, they're putting a lot of work into providing more guidance to issuers about how to use the Internet, how to use a website for disclosure; I think another place all the nuts and bolts guidance on how to put together a website.

Second item is, if you got all these issuer websites out there, the major problem I think we face in the disclosure community today is how do you find those websites. Somebody pointed out earlier that it's easy to look up in some of the central Internet-based indexes a list of all government units and give websites for all government units. If you get on the Web page for the State of Wisconsin, Florida or New York City, once you have found the home page, then the real challenge is to find out where is the disclosure site within that home page.

Walter Knorr said hits on the audit reports on the Internet are not top sellers. That's our experience, too. Yet it's very, very important to people who want to access that to get to it quicker. So, I really do think a centralized index and disclosure site is really essential.

Mr. Estrada

Let me back up, too, and say with regard to websites, Martha, while every sanitation district in every state in the union certainly can't provide their own website and probably shouldn't, every one of the fifty states in this country could certainly provide a website like what Texas demonstrated this morning and again, as Frank says, with a central index, provided nationally and perhaps fifty websites that include every issuer, the way we saw the demonstration today, that ultimately may be the ideal national model.

Mr. Pohl

As a conduit issuer, how would that work for our obligors, the various not for profits? We're not the ones to gather, it's one thing to gather and turn it over to an effective central repository, it's another to say we're going to assume the responsibility for displaying that on the website.

Mr. Estrada

With the centralized website on the national level you give each of the state websites like the MAC does, you give them the necessary information to go back to that specific issuer or contact person and say send me your final OS, send me your escrow documents, send me your annual report, et cetera.

Mr. Maco

Martha, without choosing between central index, central repository, existing system, I can think of at least eight goals for the system, or any future action. First is, it must be comprehensive. It has to recognize that the world is not made up of just general obligation bonds. I think that is something that is clearly evident just by looking at the number of papers on different topics.

Clarity, what's required of issuers under the rule; consistency with other regulatory requirements.

Certainty that dealers can trade, underwrite, recommend, because after all, this is to facilitate activity in the market, not to bog it down. Speed of filing and of access and of compliance, including the initial OS filing and any updates as well as reporting periodic events.

Affordability; I think that is the hidden criteria that we've all been sort of dancing around. These systems, considering something of national magnitude, the cost involved is something that I expect is significant, and is going to have to be borne by someone or some group.

The seventh item is doing this to the extent possible without expanding the existing envelope of liability. Liability certainly has its benefits in terms of making the source of disclosure accountable for its accuracy, but the more people that come in as facilitators or compilers, there's the potential to expand the scope of liability perhaps in a way that may not be efficient or effective. The last one is that to the extent possible it should be a market-based solution rather than a regulatory one, just for the — some of the rumblings we've heard as well today. People resist regulatory positions and that may not always produce the best result.

Ms. Haines

Well, certainly one of the criticisms I hear all the time is that the Rule is too complicated for an issuer or a broker-dealer to figure out just what are they supposed to do with regard to a particular bond issue.

Ms. Dickey

The Texas model is really very appealing, but I'm not aware of the SEC's authority to force the other 49 states to do anything at all, much less anything that efficient, and helpful.

Ms. Haines

I was going to suggest you might take that on Jane, getting all the states to do that would be an incredible undertaking, because it would have to be voluntary and the issue that we are all dancing around of who pays for it.

Mr. Estrada

Could I take a crack at that? I said before, I guess I risked incurring the wrath of my old colleagues at the MSRB, when I said it shouldn't be that much of a cost factor for the MSRB to take on being the central indexer and collector of information. Certainly they have the authority over any broker-dealer to collect the basic information to begin the process in each state.

There are assessments on Texas on every bond issue that's done that I think are extremely reasonable for the kind of data results of the kind you saw here today. I think that's something every broker-dealer community in every state, in every region, at least, could take on as a mission and the Muni Council, I think can also provide some strong support for it as a bully pulpit, and get each of the states to impose this kind of assessment per issue that pays for it.

Once you're doing it, make it a closing cost of the deal, whether the issuer thinks it's coming out of their spread or the broker-dealer thinks it's coming out of their spread or bond counsel is afraid it's going to reduce their fee, you know, let's just make it part of the cost of the deal, whoever's side it comes out of and that could be decided on a deal by deal or state by state basis, but let the deal pay for it.

I enclosed deal after deal, where issuers don't bat an eyelash at paying six figure expense line items, and paying large fees for professional services.

Mr. Maco

Let me know about those deals!

Mr. Estrada

My gosh, a few hundred bucks here and there per issue to duplicate what the MAC showed us this morning is a heck of a bargain, and the broker-dealer community and issuers should be embracing that.

Ms. Haines

What size are these fees on typical, a big issue and small issues?

Mr. Estrada

We start in Texas, Dan, correct me if I'm wrong, but I think we start at a base level at like $500 assessment on the first million of the principal amount and then it's 10 cents per thousand after that up to a cap, and then the cap can be, you know, wherever, I think in Texas the cap is $10,000 on a several hundred million dollar deal. That could vary by state and the more sophisticated the system becomes, the MAC already has the mousetrap as far as the software goes, and the system goes, so you're not paying to develop that, so I mean I think it could very easily be duplicated in 49 other states.

Ohio pretty much does already the same thing.

Mr. Hoadley

I'd like to comment on Bob's observation that the Texas MAC model can be easily duplicated in the other 49 states. I don't think it would be that easy. First of all, the Texas MAC model was started forty years ago at a point in time where this market was much, much smaller and there's a whole culture that's grown up in the public finance market in Texas, which expects the Texas MAC to be there. I don't think you could simply come in and impose that cultural tradition on another state where it doesn't exist.

Mr. Davis

I'd like to second that. There's a number of states where local issuers are quite resistant to having the state be involved in the process by which they borrow money.

Mr. Hoadley

I understand that very well. As the capital finance officer of a state, I'm frequently asked to look at and evaluate certain kinds of projects that might be at the local level and I find an immediate resistance when I go poking my nose into places where it's not really appreciated.

Texas has an advantage that, for example, all transcripts for all bond issues all fall into the Attorney General's office. Tremendous centralized collection of data. I think that automatic transferability of the Texas model to other states, while highly desirable, is not necessarily practical.

Ms. Haines

I practiced in Illinois, where there are 8,000 units of local government. So even though Texas is very large, it doesn't have as many issuers to keep track of as some other states. I'm sure there are states that have fewer than a thousand, but it varies dramatically from state to state.

What I'd like to do now is hear from the audience. I want to hear everybody's ideas. Do you have questions or suggestions we could talk about here? Jerry.

Voice

The filing fees for the cost of NRMSIRs, I think one idea that should be given consideration is where issuers are filing copies in paper form, charge them a higher fee versus people that are doing it electronically, and that way it will encourage people to file electronically and you'll reduce some of the cost to the NRMSIRs with the paper.

Mr. Hoadley

I think just as an observation about who benefits out of a municipal bond transaction and who benefits by continuing disclosure going into the future, I have to say that ultimately it's the issuer who is benefiting from the municipal bond transaction, and it's the issuer who benefits every year their bonds are outstanding. Every year they receive an applied subsidy from the United States Treasury in the form of a lower interest rate. It seems if one were to add a stick to the process at some point, it is on that relationship that the issuer is benefiting on a continual ongoing basis from that Federal tax subsidy, and as much as we'd like to stick it to the investor, I don't think it's fair to the investor to say that the investor should pay the consequences of an issuer's failure to provide disclosure.

Ms. Haines

What kind of stick do you have in mind?

Mr. Hoadley

Now, Martha, back to your disclaimers at the beginning of this session--I mean, for example, a bill sent to an issuer which represented the amount of the federal subsidy applied on the amount of business that came in.

Mr. Davis

Then we get into obviously a huge change in law. That's outside the scope of what we can do.

Ms. Haines

Definitely.

Mr. Davis

What you might be able to do...if you were able to collect adequate information about failures to comply, then you might be able to create a regime in which the party that fails to comply would be unable to borrow in the future unless they came up with a process for complying in the future that was satisfactory to MSRB, SEC, whoever that would be.

Mr. Maco

That's one of those tentative points made in the adopting release that you do have the option of tightening up a bit here. The adopting release talks about repeated instances in which an issuer has failed to file, and how it might become difficult, if not impossible, for future underwriting of such an issuer, but that language has a lot of "might's" and "ifs". Perhaps there's an opportunity for clarity.

Mr. Estrada

If we're throwing out the ground rules and talking about changing law, I think it could be a very minor tweak in the tax provisions to make this central filing with this cover sheet form document whatever we're envisioning here, make the filing of that one more requirement, just like so many other minor little things that go in the closing of the tax exempt deal now require, I mean, that gets the issuer's attention. The issuers aren't enamored of filing an 8038 or signing a no arbitrage, but if they know no deals get issued tax-exempt unless they do it, then they would do it.

Mr. Davis

I don't think we need to change law, I think we need to make Rule 15c2-12 require that an agreement to file that form is part of the undertaking preconditions.

Mr. Estrada

That's even better.

Ms. Haines

Allen?

Mr. Polsky

I think it's important to bring the panel's perspective back. There's a lot of focus on if we're going to throw things out — I have a lot of things I can throw out, but I'll just mention a couple. The idea that the current deficiencies of Rule 15c2-12 have a lot to do, that there are a lot of administrative problems with the rule and there in fact are, there are things that are misfiled and there's not the availability that there should be, but you know, if we're talking, if I get to go to my best case scenario, which is what I think we're trying to get to today, we need to look at a broader situation, we need to look at the content and the fact that the information, that it's a floor. To use the comments that were offered earlier, that it's a minimum and it's a minimum that in my constituents' viewpoint is too low. So that market based resolution is probably the way to go, but we have to keep looking at that larger picture and the comprehensiveness and clarity that Paul talked about.

Voice

I wanted to reiterate Allen's point, and that I think it's very important that we circle part of the market where we have a disclosure problem and that's the part of the market where investors, institutional investors and retail investors can get hurt and that's the part of the market where credit volatility is the highest. All the government issuers that are up here, I applaud their efforts, but that's not the area where investors are worried and that's why nobody uses the NRMSIRs.

I don't think in California the credit is going to change from year to year that much and I'm going to get information in that intervening time period to appropriately value bonds. I do care about long-term care facilities, hospitals, utilities, triple B plus and below credit the unrated market. That's where I want you, if you can, to focus your efforts because that's where people can get hurt very badly by the asymmetric risk that bonds pose to investors.

Ms. Haines

What about the private placement exception?

Voice

I'm just talking about a class of securities that we need to focus our attention on.

Voice

He's not really talking about private placements.

Voice

The other issue, too, in the negotiated market for long term care, for example, disclosure isn't a big problem and you know why, because the normal relationship between obligor and investor exists so most of those deals have negotiated disclosure provisions in the documents because you can't sell them without the investor getting the disclosure that they need. It's really the middle market stuff that's rated that are thrown out there. OS's are thrown out there investors are forced to buy them. They have no negotiating leverage and disclosure becomes a deal point.

Its can I buy this deal with quarterlies? It's crazy. Disclosure should not be a sore point; it should be a standard by which small investors have to issue deals. I think we should take the issue down to the credit volatility are of the market.

Ms. Haines

One of the significant criticisms of Rule 15c2-12 is that municipal bonds trade primarily during the first six months to a year after they're issued, except for VDRBs, which are frequently put and remarketed as a reason that we don't need Rule 15c2-12 because they're not trading anyway.

Voice

It's trading, but less than 1 percent of securities trade every day. Really pricing the funds every day, I can look in the newspaper. How can I say as a fiduciary that that's accurate when I don't have any information on it? It's anybody's guess what a security is worth.

I really do think we have to focus on the bottom end of the credit spectrum, which is actually the smaller end the market, but we have to focus on it.

Ms. Dickey

Martha, there's another area that I don't think Rule 15c2-12 focuses on at all, which is a real concern of mine and that is how information gets to the hands of individual bond-holders. There is, as best I can tell, absolutely no requirement that anyone pass along any disclosure or event disclosure to bond-holders, and that strikes me as missing one of the two key points that the SEC made when it issued its initial rule in the late '80s and then its amending rule in the mid-'90s. I believe that issuers ought to include an undertaking to provide notice to any--to make a filing not just with NRMSIRs or with the MSRB or with their SID, but to mail directly to any bondholders who provide their names and addresses to the issuer.

I don't know if that ought to be an evergreen request or if it ought to be an annually renewed request, but I have a hard time understanding why bondholders are not entitled to information.

Ms. Haines

One of the current rule filings from the MSRB is a filing requiring broker-dealers to pass along what the MSRB is calling "official communications". However, the broker-dealer has to be compensated for getting it out.

Voice

Just to follow up on Jane's point, again, I want to try and cast a slightly wider net. Current investors, obviously, critically need that information as Andy articulated, but potential investors need to be brought into the mix as well because they will be considering purchasing those securities.

Ms. Haines

I think Jane's suggestion was requiring that it be mailed to current investors when it was filed with NRMSIR.

Mr. Estrada

I would argue once we get some kind of centralized website disclosure system, if it's on the Internet, it's available to the world. That's where we ought to be going, I think, in terms of making it available to potential investors and for investors, and I think that's a lot more doable than writing a requirement that individual notices be going to individual investors.

Ms. Haines

Broker-dealers might rebel at that point. This rule on official communications is designed for things like default notices, not for annual filings.

Mr. Estrada

We've got a scheme for broker-dealers already that I think is comprehensive in terms of requiring delivery of an official statement with the sale and giving an investor current information. The whole reason for Rule 15c2-12 is for a trader to be on the phone and be offering a security with the most up to date information. So that regulatory system or scheme is there already, and as far as making more information available to a broader base, I think the Internet is the answer and we ought to be finding how to get things to the Internet.

Mr. Maco

If you want to push the envelope to its furthest extent on this, you can go back to Commissioner Walman, who suggested this in the corporate arena when he was suggesting radical reformation of current accounting reporting, which is of course always on historical basis. He proposed, after he had left the Commission, of course, that real-time financial information on the issuer be made available. That is, technology allows the window into the issuer's existing books and records.

Now, I'm not proposing that, I'm just saying this is a former Commissioner who has thought a lot about where the future may take us, and he of course is speaking to the corporate world, and presumably there would be some alteration of scheme of liability associated with it, but a real-time access look into the books and records of the issuer is about as far as you could take it on an Internet based disclosure approach.

Ms. Haines

Theoretically. That's as far as you can go.

Mr. Maco

Theoretically. He's a believer.

Voice

Getting back to the idea of the carrot and stick. I work almost exclusively in the primary market, and I found one of the things that really works, especially in the early days of, the market getting used to disclosure, was that we just don't bid the bonds if we're not comfortable with the documents. And I know I had a number of discussions with financial advisers and bond counsel back in those days that couldn't understand our position. What are we going to do with it? What we do about it is not bid your bonds. They come around pretty quickly.

I know I had conversations with Wisconsin's Capital Finance Office about a simple thing that we would like to see. If everything is electronic including your audits, we would like to see at least a summary of a balance sheet and income statement. Frank was very kind to give us that, because I stated to him that we weren't comfortable as a purchaser and we didn't feel that we were servicing our clients if we couldn't offer them at least a minimum in this paper document that's still published.

So I think a lot of the responsibility has to come from broker-dealers. Not that broker-dealers should form conspiracies against issuers, but that we just have to be disciplined about throwing bids at things where we're not comfortable with the disclosure.

I think if issuers got the idea we're not comfortable, we're not going to bid or bid cheaper, maybe they'll step up to the plate at their end.

Ms. Haines

I think one of the issues that some people in the corporate market lose track of is that a registered company's business is to make money. They have shareholders and increasing shareholder value is one of their main goals. That's really what they're focused on as their business purpose. Keeping bondholders happy is not the primary business purpose of any unit of government. There's a different frame of reference in the municipal area than in the corporate world, and it's difficult for people in the corporate world to understand how different munis are and I think--and vice versa.

Voice

May I disagree with that point?

I think if you go down to the bottom end of the credit spectrum, where the problem is, you will find that hospitals, for example, they're paying a bigger cost of capital, and we're asking for much more security on those deals than we would if there was good disclosure, they could borrow more cheaply and do it unsecured. The reason why we want all this security and we don't ask for security from tenant health care or other borrowers is we don't have the information. So why not get a mortgage so we have some leverage to do something if they decide to cut it off.

So I do think there is a charge being incurred by all these quote-unquote "corporate" borrowers in the Muni market and they're paying for it. But unfortunately, on an individual basis. They don't know as an industry they're paying for it.

Ms. Haines

You're saying there's a hidden cost?

Voice

There's a liquidity premium that's very large.

Voice

To the extent we get anybody to file these reports, again, what use are they when they are nine or ten or twelve months old? And that's what the financial statements-

Ms. Haines

But how do you make issuers have their financial statements completed any earlier, much less file earlier?

One of the problems I think comes up in the municipal accounting area where, due in part to the standard for revenue recognition, issuers generally keep their books open for 60 days or so after the end of the fiscal year to account for revenues that could be applied to expenses in the preceding year.

Voice

But there's no reason they can't estimate those? There are municipalities that will estimate those 60 days worth of revenue, based on historical accruals.

Mr. Davis

It could be coupled; the audited financial statements, the balance of the financial and operating information disclosed on an annual basis I think would have the effect of facilitating everything.

Voice

Right now if you don't file the audit, you have to include unaudited.

Mr. Davis

You have to break that apart.

Voice

You can't expect unaudited. There's no such thing.

Ms. Haines

Frequently, especially with smaller issuers, they don't exist. They may have budgetary, but not-

Voice

Then that's kind of the other thing, too. Why don't we request budgets? I mean, that tells you what's going to happen.

Ms. Haines

Hopefully.

Mr. Estrada

Before we wrap up, I wanted to go back and revisit theme that I think it was Doug Kemp mentioned this morning — whether the glass is half full or half empty. I think it's more than half full. I mean, we've come such an incredible long way from what admittedly was the adoption of a rule that was a compromise product. It wasn't the perfect rule, it wasn't the rule as originally drafted, but it was like the best we could do as an industry at the time and it left a lot of question marks when Rule 15c2-12 hit the pages, and what this industry, what is now assembled as the so-called Muni Council has done to bring clarity, consistency to what was envisioned that rule voluntarily is just tremendous.

I mean, when you think five, six years ago, we didn't even know what standards of disclosure were supposed to be, now we're talking about how can we get all issuers to sign on to best practices and where the NFMA has brought us to and where NABL has done a yeoman's service to the industry in getting everybody comfortable with what are the legal liabilities, what are the parameters of complying or not complying with the rule and TBMA, what they have done with an ungodly assembly of broker-dealers across the country, you know, this diverse makeup of broker-dealers have a consistent message and have a consistency in what they're doing that TBMA has provided tremendous leadership on, and ICI, all the others, GFOA has given us the issuer's view at the table in every discussion we've ever had, so we're not sitting around imagining what issuers will or won't do or say. I mean, we've got their representatives at the table and the people that have been most sensitive to issuers, so we're not really that far away from the goal line, I think, in getting where we need to be ultimately, and I think we should recognize it. It's not going to happen next month, but I think we're a lot closer than most people think.

Ms. Haines

Yes.

Voice

I work on the broker-dealer side and I think there's been tremendous strides. There's a huge amount of information available out there that wasn't in the past.

On the other side, I want to point out as a user of the NRMSIRs, not that long ago there used to be five NRMSIRs. Currently there are four. Actually, there are really only two anymore. Two of the NRMSIRs seem to use the data for their own purposes, in effect they're a user like I'm a user, they just happen to get it directly. That's why, the idea of a central index really scares me because if I have an index that shows me FT Interactive has some document that Bloomberg doesn't have, that I have to pay $25 to get it, and it takes me two days to get it, that just doesn't work for trading in the market.

I think that one of the things you have to look at is the cost structure involved in being an NRMSIR. The other thing you have to look at while two NRMSIRs pretty much on a real-time basis will supply you with annual financial statements, in terms of material event notices only Bloomberg really has that ability. If I'm trading a bond, I can go into Bloomberg and look at the material events on a real-time basis. The idea of creating all these websites, I have to now look at websites, decentralizing now to me is not the way to go. Perhaps centralizing having all documents come into the MSRB, that's feasible, meaning that vendors can go in on a more cost effective basis and provide more products because right now the system doesn't let vendors to go in and profitably become dissemination agents. So the cost structure and decentralizing--issuers are not going to be able to send to 400 investors their annual financial reports every year, that just is not going to happen. So you got to think about other ways to go about doing that.

Ms. Haines

I want to thank all of you for coming here today. You've given us a lot of food for thought. I particularly want to thank the panelists here who have played devil's advocate and suggested things that they don't personally or their organizations don't endorse. I've certainly asked questions that don't represent what the SEC's position is. You've given us a great amount of information to take back and to understand more about what different sectors of the industry need and where you see the problems. We're relatively isolated. You guys are out on the front lines on a daily basis and see what's really happening — what information is available, what's not, and I can't tell you how much I appreciate you sharing this information with all of us.

Thank you.

http://www.sec.gov/info/municipal/roundtables/thirdmuniround.htm