WASHINGTON - The chairman of the House securities subcommittee said yesterday he is "very seriously" considering drafting legislation that would require municipal bond issuers to provide ongoing disclosure.
But Rep. Edward Markey, D-Mass., chairman of the House Energy and Commerce Committee's subcommittee on telecommunications and finance, suggested he is not currently considering introducing legislation to curb inappropriate political contributions, and will instead carefully watch what actions regulators and the industry take.
In what appeared to be a roadmap to possible legislation, Markey also said that his panel, which has jurisdiction over securities regulation and legislation, is "carefully reviewing the options for legislative action" in four other areas.
The areas include tightening sales practices by broker dealers, requiring dealers to disclose markups of bond prices, setting up so-called "audit trails" and other surveillance systems to allow regulators to monitor trading activity, and requiring disclosure of fee-splitting arrangements between financial advisers and underwriters.
Markey indicated his panel's probable strategy at the end of the subcommittee's second oversight hearing an whether new legislation or regulations are needed in connection with municipal securities.
The panel launched its review at a hearing Sept. 9 when it heard testimony from top officials of the Securities and Exchange Commission, the Municipal Securities Rulemaking Board, and the National Association of Securities Dealers.
But yesterday's hearing concentrated on the market participants, ranging from the state and local officials responsible for issuing the securities, to bond lawyers and bond dealers.
Testifying yesterday were Richard Lehmann, president of the Miami-based Bond Investors Association; Jeffrey Green, a member of the executive board of the Government Finance Officers Association; and Andrew Kintzinger, president-elect of the National Association of Bond Lawyers.
Also testifying were Harvey Eckert, chairman of a National Association of State Auditors, Comptrollers and Treasurers' committee on secondary market disclosure; Katherine Bateman, chairperson of the National Federation of Municipal Analysts; and Gerald McBride, chairman of the municipal division of the Public Securities Association.
Markey stressed that a "radical restructuring of [the municipal) market is not called for." He said, however, "I do believe that what is needed is a carefully balanced package of reforms that are targeted laser-like at some of the regulatory or statutory gaps that currently do exist."
Markey said that the panel will be very "closely scrutinizing what the MSRB, the SEC, and the industry do on the issue of political contributions, and we are hopeful that they will do the right thing."
He made his remarks as California Treasurer Kathleen Brown announced in written testimony that she has stopped accepting contributions not only from bond underwriters, but bond attorneys, financial advisers, consultants, and accountants as well.
"To my knowledge, no other state treasurer has taken these steps," Brown said in a statement issued after the PSA said Wednesday that it has called for a voluntary moratorium on dealer contributions until the MSRB finalizes a detailed rule on the issue.
In what he conceded was a "blunt" question, Rep. Alex McMillan, R-N.C., asked McBride what "other good reason" dealers could have for making contributions across state lines other than to influence their selection for deals.
"I don't believe that the [greater] portion of contributions have been made with the intention of buying business. Most are made because [of a belief] that the candidate is a good candidate. That may sound naive" but, that is the reality, McBride said.
"On the issue of secondary market disclosure, while we applaud the voluntary industry efforts, I believe that the subcommittee will have to look very, very seriously at its legislative options," Markey said.
"We do not intend to subject municipal issuers to the full panoply of registration and continuous reporting requirements that are imposed on corporate issuers. That is neither necessary or appropriate. But we will be looking at more targeted legislative reforms to improve disclosure," Markey said.
Markey mapped, possible legislation when he asked witnesses to answer five questions. The questions signaled that Markey is eyeing a bill that would, at minimum, mandate secondary market disclosure by issuers of conduit deals over $1 million.
"Do you agree or disagree with the SEC's recommendation that at minimum Congress should adopt legislation to subject conduit bonds to continuous disclosure," Markey asked, referring to the SEC's recent report to Congress on issues in the municipal market.
Green, Kintzinger, and Bateman said they would agree, but only if current voluntary industry efforts fail after being given an additional 18 months to work. Lehmann and McBride agreed with the idea, and Eckert disagreed, saying that the problem can be handled under current state standards.
All six agreed when asked whether the greatest disclosure problems and the highest risks of defaults have been with unrated bonds, particularly hospital, housing, special district, and industrial development bonds.
Markey asked, "Do you agree or disagree that issuers who borrow $1 million annually should be required to provide disclosure regarding material information that should be known to the market?"
"I agree that information should be provided, but I disagree with the use of the word required," said Green, noting that the federal antifraud statutes already require issuers to supply material information about their bonds. Kintzinger agreed with Green. Eckert said the information should be provided, but he reserved comment on the $1 million floor. McBride and Lehmann agreed with the statement.
Markey also asked whether the GO bonds of large issuers and insured bonds pose less of a problem from a disclosure standpoint. Green agreed, regarding large and frequent issuers, and Kintzinger agreed in connection with large issuers. The other four agreed with Markey's statement.
Finally, Markey wanted to know whether official statements are being adequately provided to the market under the SEC's 1989 distribution rule 15c2-l2, and whether that process provides an acceptable alternative to "corporate style SEC registration."
All agreed except Eckert, who said he had no comment.
Regarding price dissemination, Rep. Marjorie Margolies-Mezvinsky, D-Pa., wanted to know whether dealers should be required to disclose markups on confirmations. Lehmann said markup information is not appropriate on the confirmation.
Instead, customers need an independent source for comparing prices, which currently are only available to subscribers to electronic services. The PSA also said in a statement following the hearing that the confirmation would not be an appropriate place.
