WASHINGTON -- The Securities and Exchange Commission is watching trends in the use of negotiated bond offerings and the sale of derivative products, and may impose new rules on the municipal market if they are needed, Securities and Exchange Commission member Richard Roberts told lawyers Friday.
"I think that [the industry's use of negotiated underwriting] is an area to be alert for at least some jawboning, if not some regulatory action" by the SEC, Roberts told a meeting sponsored by the American Bar Association.
"The commission is concerned that the way that municipal securities transactions are structured has flipped to some extent. Thirty years ago, you had 75% competitive and 25% negotiated for long-term municipal bonds. Now it's exactly the opposite," he said.
"There's some good reasons for that and there are some not so good reasons, as well," Roberts said.
But he noted that the percentage of negotiated deals already appears to be declining in response to concerns raised recently by regulators, which means that commission action may not be needed.
Roberts also said the agency is monitoring the sale of sophisticated derivative products to investors.
"If the group of investors that derivative instruments are sold to continues to broaden, at some point and time a suitability rule is a possibility," Roberts said, noting that his views are his own and not necessarily those of other commissioners.
A suitability rule might bar dealers from selling complex derivative products to unsuitable buyers, such as small investors.
"That [bridge] has not been crossed yet," Roberts said. "Obviously, there is no cause for panic" from the standpoint of securities regulators.
But, he said, "Everyone seems to be spooked by the large notional amounts that are floating around." He asked if a counterparty in a derivatives transaction fails, "is there potential for a domino effect [that poses] a systemic risk?"
Roberts said the SEC is pleased about growth in mutual funds, but the agency has concerns about the risk to capital formation in the event of a downturn in the market.
"What's the best way for the commission to oversee the [mutual fund] industry? We can add a jillion people to our staff, but that doesn't strike me as a particularly cost-effective way to approach it," Roberts said.
"I suppose some sort of enhanced self-reporting or enhanced self-compliance system, or some combination thereof' is something that the commission may look at in the "not too distant future," he said.
Roberts' comments on negotiated deals comes one month after the SEC sent a memo to Rep. Ronald Wyden, D-Ore., that stopped short of saying whether or not there have been too many negotiated underwritings.
In a Sept. 21 letter accompanying the memo, SEC Chairman Arthur Levitt told Wyden that although "negotiated offerings have their place in many cases," the SEC recognized that competitive bidding tends to provide cost savings to issuers and presents "fewer opportunities for issuers to show political favoritism."
"As a general matter, the commission believes that issuers should constantly evaluate the benefits of competitive bidding as they explore financing alternatives," Levitt said.
