WASHINGTON - Barring municipal securities dealers from recommending bonds to investors unless the issuer has pledged to provide secondary market disclosure could wreak havoc with bond sales, a Public Securities Association official said yesterday.
Micah Green, executive vice president of the PSA, said a recommendation that issuers be indirectly required to pledge in bond documents that they will provide ongoing disclosure would create a "presumption" among investors that many municipal bonds are not liquid in the secondary market. Such a recommendation was made by the Securities and Exchange Commission staff to Congress last week.
"Investors need to know they can sell their securities," Green said in a telephone interview. "If there is a presumption of illiquidity, then investors won't have that confidence and issuers won't have that access" to the market, Green said.
He said the PSA agrees with the SEC staff s premise that voluntary efforts to improve secondary market disclosure have not worked adequately and that federal standards are needed.
But, he said, the federal standards should focus on issuers, not dealers.
Green's comments reflected a three-page policy statement that the PSA's municipal securities executive committee released on July 26. The PSA in the statement urged the SEC to propose rules requiring issuers to submit secondary market information to the MSRB's ongoing disclosure repository.
The SEC staff s recommendation appears in a 100-page report to Congress that was released this week that calls for new rules or legislation to deal with political influence peddling, lagging disclosure, and other issues affecting the municipal securities market.
The staff report, along with reports submitted by the Municipal Securities Rulemaking Board and National Association of Securities Dealers, were requested on May 24 by the House Energy and Commerce Committee and its subcommittee on telecommunications and finance. The subcommittee, chaired by Rep. Edward Markey, D-Mass., will conduct a hearing on the three reports this morning.
The SEC staff recommended that the commission bar dealers from selling bonds without pledges of ongoing disclosure if Congress does not directly require disclosure by state and local governments. The agency staff also said that Congress should require registration of conduit bonds.
Meanwhile, representatives of issuers urged Congress to use caution in imposing any new regulations.
"We're against ideas that would impose additional burdens on issuers," said Milton Wells, director of the office of federal relations for the National Association of State Treasurers.
Wells said, however, that he personally would not feel "queasy" about federal standards for some conduit bonds. "I think there's probably a higher degree of likelihood that [regulators] will get [legislation] on conduits than on other things because there's actually documented cases of abuses."
"We plan to have a group of treasurers that will be in a position to react quickly to any proposals. Certainly, as long as there's a public perception of a problem, there's a problem." Wells said.
He cited a barrage of recent articles in the national press about problems surfacing in the municipal market, pointing, in particular, to the cover story of the Sept. 6 issue of Business Week entitled "The Trouble With Munis."
Catherine Spain, director of the federal liaison center of the Government Finance Officers Association, called the overall tone of the reports "positive." None of the regulators found that "this is a market in crisis," she said.
"We believe that many of the recommendations are constructive and should be implemented," such as those calling for tougher standards for the sale of only suitable bonds to investors, Spain said.
But she said that while secondary market disclosure needs improvement, the GFOA continues to believe that the current voluntary. system should not be abandoned. "The [SEC] report points to the failures of CDI as one justification for change in the system," Spain said, referring to the MSRB's pilot Continuing Disclosure Information system. "We think that's premature."
"CDI is still in the pilot phase and issuers did not have access to it until this past spring." she said.
Spain said that options outlined by the SEC aimed at improving disclosure would be significant changes in federal policy." She said the GFOA staff will take them to the group's committee on governmental debt and fiscal policy and the GFOA executive board for consideration.
She said the GFOA opposes repeal of the Tower Amendment, the 1975 that restricts the ability of federal agencies to regulate issuers. "Congress should give MSRB proposals a chance to work and if these approaches do not work, any further response should be measured and targeted," she said.
Relmond VanDaniker, executive director of the National Association of State Auditors, Comptrollers and Treasurers, said yesterday that his group hopes Congress holds off on enacting new standards until states have had a chance to implement the recommendations of a broad-based industry panel on secondary market convened by the association last November.
The panel, the Blue Ribbon Committee on Secondary Market Disclosure, late last month urged states to establish central information offices to improve collection of secondary market disclosure and to make information more comprehensive.
"We would like to see the states given an opportunity to pursue [this] kind of project," VanDaniker said. "If, in fact, this were to fail, then perhaps federal regulation is warranted. But since the project is now on the table, we think we should be given a fair chance.
"At this point, the market itself does not have that many defaults and we just don't think that kind of legislation is warranted."
