WASHINGTON -- The Securities and Exchange Commission should restrict tax-exempt money market funds from investing in short-term municipal paper of issuers that do not pledge to provide secondary-market disclosure, SEC Commissioner Richard Roberts said yesterdary.
Speaking at a conference sponsored by the Investment Company Institute, Mr. Roberts said he made the recommendation to the agency's investment management division, which is expected as early as December to propose revisions to the agency's Rule 2a-7 that could set new diversification and quality requirements for managers of tax-exempt money market fund portfolios.
He later said division officials, independent of his recommendation, are looking at such a proposal.
In March, the SEC ruled that taxable money market funds can invest only up to 5% of their assets in "second tier" commercial paper and other short-term debt, such as debt rated A-2 and P-2. Also, no more than 1% of a fund's assets or $1 million per issue, whichever is greater, can be invested in second-tier debt.
The SEC limited a fund's holdings in "split paper" -- an issued rated differently by various agencies. It also said a fund can invest no more than 5% of its assets in securities of any one issuer and no more than 10% of its assets in securities guaranteed by any one bank or other institution.
The Investment Company Institute, in a close vote in late March, recommended that most of those quality and diversification standards be adopted for tax-exempt funds as long as an SEC limit on a fund's holdings in split securities be relaxed for tax exempts.
Mr. Roberts, who has carved out a niche at the SEC as a proponent of improved disclosure in the bond markets, said in an interview following his speech that the SEC, for example, could state that no more than 5% of a fund's portfolio could be invested in tax exempt paper whose issuer does not pledge to provide ongoing disclosure. But he stressed he has recommnded no particular method.
He also stressed that his recommendation would not be a backdoor maneuver on the SEC's part to get secondary market disclosure in the municipal market off the ground.
"It becomes difficult to value the [securities held by funds] on a daily basis unless there is current information," said Edward Pittman, counsel to Mr. Roberts.
A number of industry groups have issued voluntary standars for ongoing disclosure in recent months but issuer response has been extremely sluggish.
The SEC is restricted under the so-called Tower Amendment of the Securities Act Amendments of 1985 from directly requiring issuers to supply annual financial statements, notices of current events affecting their bonds, and other secondary market disclosure.
However, the agency could bar money market portfolio managers from buying tax-exempt short-term paper from issuers who do not pledge to provide ongoing disclosure. While such a rule would apply only to short-term debt, it probably would have a ripple effect, Mr. Roberts said. If issuers are supplying ongoing disclosure for their short-term debt, they might supply it for longer-terms bonds, he said.
Mr. Roberts said the need for current information in the secondary market was highlighted for him by the problems experienced by tax-exempt money market funds holding variable-rate demand notes that were insured by Mutual Benefit Life Insurance.
"Upon seizure of the insurer, which had provided credit support for over $244 million in variable-rate demand notes, funds operating under Rule 2a-7 were required to divest themselves of these securities," he said. "Nevertheless, without information concerning the current financial condition of the underlying issuers there were significant problems in valuing the securities for resale."
