WASHINGTON -- If you are going to do something, make sure it will work.
That, in effect, was the wise message that Christopher A. Taylor, the executive director of the Municipal Securities Rulemaking Board, sent to the Securities and Exchange Commission last week.
Taylor raised an excellent point when he implied that the SEC's current effort to improve disclosure practices in the secondary market for municipal bonds is a back-door one that doesn't go far enough and could create more problems than it solves.
Since the infamous Tower Amendment generally protects issuers from being told what to disclose, the SEC wants to get around it by enacting a rule that would prohibit bond dealers from recommending outstanding municipal securities to investors unless the issuer provides continuing information about its finances.
The logic of the SEC's approach appears to be: If we can't require issuers to disclose the financial information that the market should have, we'll put the squeeze on dealers and investors in the hopes that they'll lean on issuers.
But Taylor said the MSRB fears that such a rule could bring the secondary market to a halt if dealers cannot get reliable and comprehensive information about issuers.
Rather than risk a market shutdown, Taylor urged the SEC to go one step further and put some teeth into its plan.
He urged the SEC to rule that issuers would be in violation of the antifraud statutes if they don't make periodic disclosures of vital financial information. He went on to suggest that the SEC require that material be filed in a central location, such as the MSRB's repository, where analysts easily can get their hands on it.
Taylor got to the crux of the situation when he told a conference in New York City last week that "we need a market where analysts are analyzing information, not searching for it."
Taylor's suggestions come as the SEC is working with issuers to develop by January a list of items that should be disclosed to the market. The SEC should incorporate the list into any rule it drafts and then follow Taylor's suggestion and apply the antifraud statutes to issuers' disclosure practices so that issuers will know exactly what they should supply to the repository.
While Taylor's suggestion of applying the antifraud statutes is an excellent one, the SEC also should consider taking a much bigger step.
It should consider asking Congress to modify Tower so that it can write a rule that upfront requires issuers to file a specific list of disclosure items with the MSRB.
Such a flat-out requirement is a much more straightforward and workable way to spur better disclosure than going after issuers through dealers or using the antifraud statutes after the fact.
