WASHINGTON -- The municipal bond market is basically healthy despite problems such as the Bridgeport, Conn., bankruptcy and the seizure of bond insurer Mutual Benefit Life Insurance Co., Securities and Exchange Commission Chairman Richard Breeded told a Senate panel yesterday.
"I wouldn't say the municipal bond market is without problems, but in the main, I think it's a market that has proven large, growing, and resilient," Mr. Breeded testified at a Senate Banking Committee hearing on the agency's authorization request for funding for fiscal years 1992-1994.
Mr. Breeden said that with the number of insurers active in the municipal bond market, it is inevitable that their current financial problems will have "some effect" on the market. "But I don't yet see any problems that are beyond the system's ability to react to and respond to in an appropriate way."
Mutual Benefit, which has guaranteed 59 industrial revenue bonds nationwide, totaling $809 million, was seized this month by New Jersey insurance regulators. The seizure followed a run on assets by policy holders after it was disclosed that the firm's real estate investments had soured.
Regarding Bridgeport, which filed for bankruptcy on June 6, Mr. Breeden warned that there is a "tendency" to focus on the problem rather than the strengths, of markets.
"Certainly that's true of the municipal market. Where you have a default [or] a declaration of bankruptcy, a great deal of publicity surrounds that occurrence," he said.
"But this is a market that is nearly a trillion dollars in size," he said. It's operated for a long time," said Mr. Breeden, who was responding to questions by Sen. Christopher Dodd, D-Conn., the committee chairman.
When asked by the Connecticut lawmaker if he had confidence in the municipal market, Mr. Breeden responded, "Yes." Sen. Dodd conducted hearings March 13 and April 24 on the impact of the Tax Reform Act of 1986 on the municipal market and the need for improved disclosure.
But Mr. Breeden said the SEC has concerns about some of the more "far-flung entities of government that have sometimes issued obligations with unhappy results for investors and less than adequate disclosure."
He added that liquidity in the secondary market for municipal securities is impaired by the difficulty of obtaining relevant current information for many issues. Bridgeport's difficulties "underscore the need to further commission efforts in this area," he said. The chairman pointed to two steps already taken by the SEC: the agency's 1990 rule for disseminating official statements, 15c2-12, and its 1989 legal interpretation of the responsibilities of underwriters.
A Municipal Securities Rulemaking Board proposal to establish an electronic library for continuing disclosure was recently tabled by the commission until the panel comes up with a system that can accept secondary-market information on paper as well as electronically. MSRB staffers are expected to make a recommendation to board members on whether to again propose the continuing disclosure system at an MSRB quarterly meeting next week.
"We would like to see the municipal market [bettered] through continuing improvements," said Mr. Breeden. "We have to make sure we do whatever we can to strengthen liquidity in that market.
There, the insurers are a problem," Mr. Breeden said, in a reference to Mutual Life's financial woes. "One of the traditional attributes of the market is that the liquidity in the individual instruments of many municipal obligations is much lower than what might be present in corporate bonds. That liquidity in the marketplace has been substituted for by a number of intermediates who offer to purchase and repurchase those securities."
Mr. Breeden conceded that the SEC has a "lesser role" in the municipal market than it has in the corporate securities market. "Nonetheless, it's one where we have an important responsibility."
In other questioning, Mr. Breeden said the U.S. Supreme Court's June decision in Lampf v. Gilbertson, which restricted the filing of investor fraud suits to one year after discovery of the violation and no more than three years after the violation occurred, will "sharply" limit the number of cases brought by the private sector.
In response to a question by Sen. Richard Bryan, D-NEv., Mr. Breeden said the decision is bad news for the SEC and other public enforcers, who need the backup of private investors ' litigation to keep their own caseload at a manageable level. Sen. Bryan introduced legislation this week that would give an investor two years after he or she knew or should have known about a securities violation to file a fraud suit, but no later than five years from the date of the violation.
Mr. Breededn said he supported efforts by Congress to extend the statute of limitations imposed by the high court.
"In any case where there is extremely complex fraud," one year is not long enough for facts to come to light for preparation of a law suit, he said.
