The Tax Equity and Fiscal Responsibility Act of 1982 required the registration of ownership of newly issued municipal bonds and resulted in the effective elimination of bearer municipal bonds and resulted in the effective elimination of bearer municipal bonds and the physical delivery of new municipal securities issues. Many issuers adopted book-entry systems of registration and directed the registrar for an issue to register the entire issue in the name of a securities depository. Under most legal documents, notices are only required to be given to registered owners. As a result, many notices only go to nominees and do not reach the beneficial owners of the securities.

The impact of book-entry systems on the process of communicating with beneficial owners has recently come into light. Beneficial owners of defaulted securities have not received important notices from issuers, registrars, paying agents or trustees that relate to the defaulted securities, such as the initial notice that a default has occurred, notices ordered to be sent to beneficial owners as a result of court proceedings, and notices detailing developments in the case, including bond calls and tenders.

GFOA Position
The Government Finance Officers Association (GFOA) supports a joint effort by organizations representing municipal market participants to develop and implement uniform practices that will serve as standards for proper action to be taken by market participants to assure that important default notices are actually received by intended recipients. However, the decision to initiate communication to bondholders shall be at the discretion of the issuer and the joint statement of uniform practices should state that these practices are not intended to create new disclosure obligations for issuers. These practices, which should be implemented as soon as possible, should address

• the need for bond documents to take into account the existence of book-entry systems of bond registration and the registration of securities in a single nominee name;
• the responsibilities of all nominees, regardless of their position in the chain of ownership, to identify communications directed to them, transmit notices as required, and assist issuers or their agents in providing the names and addresses of beneficial owners;
• procedures for the payment of reasonable costs associated with the transmission of notices that are incurred by issuers, conduit borrowers, registrars, and other market participants and procedures for prior notification to the issuer if costs will be incurred on its behalf;
• procedures for requesting information about beneficial owners from depositories and their participants, including methods for obtaining securities position listings from depositories and lists of nonobjecting holders of securities, and procedures for the provision of notices
• the development of record dates for various types of notices;
• the forms of notices;
• the information recommended to be included in an official statement regarding the book-entry system, including the procedures beneficial owners can take to augment their receipt of notices;
• methods for improving the dissemination of notices through various national and state repositories and other systems, including the Municipal Securities Rulemaking Board's Continuing Disclosure Information System;
• methods for improving operational procedures of depositories to facilitate the identification and dissemination of notices; and
• methods available to depositories and their participants to ensure that their participants and nominees holding through their participants agree to follow these standards.

GFOA notes that these procedures may be appropriate for other notices to bondholders.

GFOA believes that the Securities and Exchange Commission has authority to take appropriate action to encourage an improved system of bondholder communications consistent with its regulatory responsibilities for the national system for clearance and settlement of securities transactions. However, GFOA prefers a voluntary effort by market participants to provide an effective system of communications with beneficial owners of municipal securities that involves a sharing of responsibility for improvements by all market participants.

• Publication date: June 1997