WASHINGTON -- The Senate Banking Committee unanimously approved legislation yesterday that would authorize federal agencies for the first time to regulate the sales practices of government securities dealers.
But the legislation, which would amend the Government Securities Act of 1986, would not give regulators the green light to require dissemination of price and volume information in the market.
Instead, the bill, S. 1247, only orders a further study of private-sector efforts to disseminate this information.
The proposed amendments were endorsed yesterday by the Public Securities Association, which has been urging Congress to hold off on regulating price dissemination until the group's new industry joint venture pricing project, GOVPX Inc., has gotten off the ground.
The PSA also gave limited support to provisions authorizing the National Association of Securities Dealers to write sales practice standards for securities firms -- with the Securities and Exchange Commission's approval -- and for banking regulators to write such rules for banks.
Under the bill, sponsored by Sen. Christopher Dodd, D-Conn., and Sen. Phil Gramm, R-Tex., the regulators would need clearance from the Treasury before they could approve rules. The Treasury could reject a rule if it found the rule would hurt market liquidity or efficiency or impose unnecessary burdens on competition.
"By granting the Treasury a constructive role in the formulation of sales practices regulation, the committee bill will ensure continued liquidity in the $3 trillion government securities market," said Betsy Barclay, the PSA's director of legislative affairs, in a letter to the committee.
"The SEC and the Federal Reserve Board have objected to the role we have given the Treasury in the rulemaking process, but I believe it is an appropriate role," said Sen. Dodd. "We believe this approach will encourage the regulators to work together to develop rules that both protect investors and ensure the continued efficiency of this important market."
Dealers are reviewing a confidential copy of amendments to the 1986 law drafted by Rep. Edward Markey, D-Mass., chairman of the House Energy and Commerce subcommittee on telecommunications and finance. Rep. Markey has raised major concerns about the lack of sales practices and price dissemination regulation in the government securities arena and is expected to draft a bill imposing tougher standards on industry than the Senate version.
A copy of the draft amendments was not available at press time. The panel is expected to hold a hearing on the amendments July 25, and no "mark-up" of the legislation has been scheduled.
Meanwhile, the Dodd-Gramm bill is headed for the full Senate, which could take it up as early as today.
The bill directs the Treasury, SEC, and Federal Reserve Board to monitor private-sector efforts to disseminate price and volume information and to report back to Congress in 18 months. But the panel rejected a proposal by Treasury that it be given broad authority to require dissemination of prices.
"We believe that, in view of private-sector efforts such as GOVPX, it may be premature to authorize rules at this point," Sen. Dodd said. "The private sector needs time to develop its system. Of course, we are presuming that they will operate in good faith. If they do not, I can promise that we will be back at this again in two years."
GOVPX, a for-profit venture involving 40 primary dealers and five interdealer brokers, began disseminating real-time price information on all U.S. Treasury bills, notes, and bonds in the interdealer brokers market last month. The company announced Monday the first enhancement to the system -- best offer information for all Treasury securities prices carried by GOVPX.
The Senate bill would require regulators to study sales practices rules already in place for other segments of the market before writing their own standards. This is important for banks, which in many cases follow the sales practices rules of the Municipal Securities Rulemaking Board in connection with government securities trading, said Sen. Dodd.
The PSA's Ms. Barclay said the Senate bill should distinguish between sophisticated and unsophisticated buyers in terms of sales practices protection.
"Placing additional duties and liabilities on a dealer to institutional investors would increase risk of exposure to market makers, ultimately at the expense of all taxpayers [through higher interest rates] and the investor [through higher transaction costs]."
