The Central Post Office: making your life easier and the market more efficient.

Providing financial information to bondholders after the original issuance remains a confusing exercise for many state and local governments. However, a new initiative greatly facilitates the disclosure process for the issuers that must file this information and the many investors, analysts, and broker/dealers who use this information. The Central Post Office, as the initiative is known, allows issuers to file their disclosure documents using a free Web-based system that forwards the filings to each of the securities information repositories and helps ensure compliance with the requirements of SEC Rule 15c2-12. This article summarizes the evolution of disclosure requirements, reviews GFOA guidance on disclosure practices, and discusses how the Central Post Office is facilitating the disclosure process for all municipal market participants.

DISCLOSURE THROUGH THE YEARS

While the SEC does not directly regulate the issuers of municipal bonds, for the last 30 years the agency has sought greater influence over the municipal market through regulation of the broker/dealer community. Municipal market participants have always been subject to the broad anti-fraud provisions of the Securities Acts of 1933 and 1934--legislation spawned by the stock market crash of 1929 and the Great Depression. But the sea change in disclosure practices in the municipal market did not occur until 1989, when the SEC promulgated Rule 15c2-12. This rule requires municipal securities dealers to (1) obtain and review an official statement prior to any offering or purchase of municipal securities and (2) contract with the issuer to supply to the purchasing dealer an adequate number of final official statements within seven business days of the sale. While the rule regulates broker/dealers rather than issuers, it has the practical effect of preventing issuers from selling bonds without an official statement, since no underwriter could buy such bonds.

Throughout the 1990s calls for improving the adequacy and completeness of continuing disclosure documents dominated the public discourse in the tax-exempt bond market. While frequent issuers provided annual financial information to the market through the official statements required for each offering, infrequent issuers often did not provide updated financial information until the next time they went to market. As such, many years could pass before new information became available for some governments. Although some investors insisted that issuers provide annual financial information, there was no legal obligation for issuers to do so until Rule 15c2-12 was revised in 1994. Except for certain exemptions, the revised rule prevents underwriters from purchasing municipal bonds unless the issuer and/or other appropriate parties enter into a contractual undertaking to provide: (1) annual financial information by a certain date, (2) timely notice of certain material events whenever they occur, and (3) notice when the required annual disclosure materials are not provided by the required date.

The contractual undertaking calls for issuers to file their annual continuing disclosure documents with "each nationally recognized municipal securities information repository (NRMSIR) and appropriate state information depository (SID)." (1) NRMSIRs are private information services approved by the SEC that may charge users for receiving the information, but may not charge issuers for the right to submit information. There are four SEC-approved NRMSIRs.

There are exceptions to the rule for governments that do not issue more than $10 million annually, as well as further clarification of responsibilities for "obligated parties" and conduit borrowers. Governments should seek the expertise of their bond counsel on these matters. (2)

GFOA GUIDANCE ON DISCLOSURE

Continuing disclosure is not only required, it is also key to maintaining favor able relations with investors and analysts and the confidence of other government stakeholders. GFOA has provided disclosure guidelines for state and local government securities, as well as recommended practices for formatting and presenting financial information. In 1996, the GFOA Executive Board approved the recommended practice Using the Comprehensive Annual Financial Report to Meet SEC Requirements for Periodic Disclosure. The recommended practice affirmed that the comprehensive annual financial report is a means for providing information useful to current bondholders and potential investors in the secondary market and for meeting the periodic disclosure requirements of Rule 15c2-12. The recommended practice also outlined the benefits of using the CAFR for disclosure filing purposes.

In 2003, the Executive Board approved an updated version of the 1996 recommended practice entitled Maintaining an Investor Relations Program. This recommended practice urges issuers to consider developing an investor relations program. It reads: "The centerpiece of such a program is a commitment to provide full and comprehensive disclosure of annual financial, operating, and other significant information in a timely manner consistent with federal, state, and local laws." It identifies the benefits of a comprehensive investor relations program and underscores the importance of ongoing relations with investors and other stakeholders. Issuers may wish to contract with dissemination agents to facilitate the compilation and submission of disclosure documents and to provide easy access to Web-based gateways to those documents.

The recommended practice also suggests that issuers may want to distribute additional disclosure materials beyond that which is required under SEC Rule 15c2-12. That determination should be made by each government in consultation with bond counsel and the other members of its finance team. Organizations such as the National Association of Bond Lawyers have also encouraged the practice of providing additional information to the marketplace, and this issue continues to be a topic of discussion at disclosure policy forums. (3)

ORIGINS OF THE CENTRAL POST OFFICE

There is no doubt that the emergence of the Internet, e-mail, electronic documents, and advanced information systems have changed the face of public finance. Technology has not only enhanced our internal transaction processing and analytical capabilities, but it has also made communicating financial information to stakeholders easier and more efficient. For years, GFOA has encouraged state and local governments to embrace the use of technology in all aspects of financial management. It has provided leadership in this area through recommended practices, public policy statements, training and conference sessions, and numerous publications.

GFOA supports the use of state and local government Web sites for making financial information more readily accessible to stakeholders. Both the Committee on Governmental Debt Management and the Committee on Accounting, Auditing, and Financial Reporting have provided guidance to GFOA members on this topic through recommended practices--Using a Web Site for Disclosure (2002) and Using Web Sites to Improve Access to Budget Documents and Financial Reports (2003). These practices clearly outline the issues governments should consider in determining the types of information to post on their Web sites and the most appropriate ways to present this information. Governments of all sizes should continue to embrace the ever-changing opportunities afforded by the Internet and other technologies.

How to leverage technological advances to improve disclosure practices was a central question four years ago when representatives from all of the stakeholder groups in the municipal bond market met and formed the Muni Council. These first informal meetings brought together issuers, underwriters, analysts, trustees, investors, and bond counsel to discuss concerns about disclosure practices and identify areas of agreement on how to make the system better. After nearly three years, the Muni Council determined that a critical first step toward improving disclosure practices was the creation of a voluntary central filing point for issuers from which electronic disclosure documents would then be disseminated to all of the NRMSIRs and any applicable SIDS.

Because of the nature of the SEC-approved NRMSIR system, the Muni Council decided that the Central Post Office would not be a central repository but rather a central pass-through location. Such a system would relieve issuers of the burden of submitting disclosure documents to all four NRMSIRs and any applicable SID and yet still ensure that this information made it to the repositories as required by Rule 15c2-12. While it sounds like a simple premise now, much thought and effort went into how to design a system that would prove helpful to the tax-exempt bond community at large without imposing additional burdens on issuers. It is a credit to the members of the Muni Council that they were able to lay aside their differences and come together to create a system that better serves all of the participants in the municipal bond market.

As the Muni Council continued to work out the details of the Central Post Office, the GFOA membership adopted changes to the public policy statement, Disclosure and Federal Regulation of the Market for Municipal Securities, that embraced an electronic and simplified disclosure filing system. At the 2003 annual business meeting in New York City, GFOA members approved the Executive Board's recommendation that the association support centralized collection and dissemination of disclosure information that does not place additional burdens on state and local governments, is not part of the federal government system, offers beneficial features to issuers, and operates on an electronic-based platform. The policy statement reiterates GFOA's longstanding position that the SEC should not impose any new disclosure requirements on issuers, and it urges the agency to act as narrowly as possible in ensuring that the use of electronic and central filing is compliant with Rule 15c2-12.

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