Using your Web site to enhance bond market disclosure: the proliferation of government Web sites offers a powerful tool for communicating disclosure information to the municipal bond market.

• Author: Watkins, J. Ben, III
• Position: Government uses the Internet

The Internet has fundamentally changed the way information is communicated and the way business is conducted. Governments have embraced technology in the quest to operate more efficiently and effectively and to better serve their constituents. Governments use their Web sites in a variety of ways to communicate with and serve the public. The purpose of this article is to describe how governments, as issuers of tax-exempt bonds, can use their Web sites to disseminate disclosure information to the capital markets.

Investors, analysts, and regulatory agencies have all applauded the use of government Web sites for the purpose of disclosure. The Securities and Exchange Commission has embraced Internet disclosure for its ability to promote transparency, liquidity, and efficiency in the capital markets. The Government Finance Officers Association recently adopted a new recommended practice encouraging its members to use their Web sites for disclosure purposes. (1) The Internet, in general, and issuers' Web sites, in particular, provide powerful tools for communicating with and disclosing information to credit analysts, investors, underwriters, and other municipal market participants.

Some issuers already have disclosure Web sites up and running, and are effectively using them to communicate financial information to investors and other stakeholders. These governments are using their Web sites to provide electronic access to preliminary official statements, final official statements, audited financial statements, and other documents related to the sale of municipal securities. The Internet also can be used to disseminate continuing disclosure filings and other important financial information, and some governments are using their Web sites in addition to, or in lieu of, traditional press releases. As such, government Web sites can be an integral part of an effective investor relations program, augmenting other means of communication with the municipal market. (2)

The Benefits of Web-Based Disclosure

One of an issuer's most important objectives in connection with issuing debt is to borrow at the lowest possible interest rates. There are a multitude of factors that have a bearing on the interest rates issuers pay on their bonds. Many of these variables are beyond the issuer's control, such as prevailing market rates, the supply of municipal bonds, and investor appetite for fixed-income products. However, the accessibility of information about a particular credit or bond issue is one variable that issuers can control and that may impact interest rates. Investors have confirmed time and time again that good disclosure, especially in a troubled sector, increases their appetite for an issuer's bonds. Although it is difficult to quantify and prove, investors also indicate that good disclosure increases the price they are willing to pay for bonds and, therefore, decreases the interest rates on those bonds.

Trust and confidence are intangibles that still play an important role in the credit markets. Web site disclosure can enhance an issuer's reputation in the capital markets. An investor's perception of an issuer, even based on subjective factors, can affect an investor's buy-sell decision. If investors believe the issuer will provide accurate, complete, and timely disclosure information, they will be more likely to buy the issuer's bonds. Investors are also less likely to sell bonds of an issuer experiencing financial difficulties if they believe the issuer will provide necessary disclosure on a timely basis. Conversely, when investors believe an issuer is not providing information necessary to evaluate creditworthiness, they will be less likely to buy that issuer's bonds and more likely to sell sooner in a deteriorating credit scenario. This dynamic suggests that it is good business practice to provide more disclosure information than what is legally required.

In today's market environment, many issuers want to have more frequent contact with market participants because of the needs of specific industry sectors (e.g., healthcare) or issuer-specific developments such as budget deficits or catastrophic events. The Internet provides an easy way for issuers to provide disclosure information more frequently and to revise such information when circumstances change or further developments occur. The consistent and ready availability of complete and timely disclosure information can enhance the secondary market liquidity of an issuer's bonds, making them more attractive to investors.

Web sites often can be used in addition to, or in lieu of, press releases and legal notices to notify the market of significant events. Governments have traditionally used these means to inform market participants of events such as budget shortfalls, future borrowing plans, bond redemptions, and upcoming bond sales. The published advertisements can be relatively expensive compared to the minimal administrative cost of posting information on a Web site. In some cases, bond indentures still may require published legal notices.

The use of the Internet for disclosure also allows issuers to control the content and timing of information released to the market. Many significant events that warrant disclosure are either very technical or caused by financial developments. By their very nature, these matters require precise explanations for proper disclosure. Relying on traditional press releases to adequately and accurately disclose such information can be fraught with peril. Reporters and other information vendors typically condense, paraphrase, and editorialize information they are given to fit their space requirements or to conform it to their particular medium. As a result, information necessary for a complete understanding of the events warranting disclosure may be mischaracterized or omitted entirely. In this regard, Web sites represent a far superior means of disclosing technical information to investors. (3)

Web-based disclosure can reduce the number of investor inquiries and satisfy investor requests for more accessible and less costly disclosure information. Responding to individual investor questions can be very time consuming. In most situations, multiple investors ask the same general questions. It is much more efficient to address these questions on the Internet than to respond to each specific request. Nevertheless, issuers should provide a telephone number and e-mail address for a contact person who can provide users with assistance.

The Internet also provides for the simultaneous release of disclosure information to the entire market, eliminating the possibility of a particular investor having an unfair advantage because of earlier access to the information. The notion of simultaneous disclosure to all investors is consistent with the SEC's adoption of Regulation FD for the corporate market. (4) Although not applicable to the municipal market, the principles contained in Regulation FD exemplify the SEC's position that all recipients should have equal access to information.

The Internet is an ideal medium for updating investors about changes or developments as circumstances warrant. Traditionally, issuers provide information to the market when they sell bonds (by printing and distributing a...