WASHINGTON - The chairman of the House subcommittee that oversees the municipal securities market said yesterday he will probably introduce legislation to force the market to beef up its lagging disclosure practices and correct other major problems.
"I think there is a very high probability that this subcommittee will be legislating in this area," said Rep. Edward Markey, D-Mass., chairman of the House Energy and Commerce Committee's subcommittee on telecommunications and finance.
But Markey indicated that he would wait a few months to give the Securities and Exchange Commission and the Municipal Securities Rulemaking Board time to try to use their existing powers to devise some solutions before he took any action.
Markey made his remarks at the panel's first oversight hearing in year on the adequacy of laws and rules governing the municipal securities market. The hearing focused on reports submitted Sept. 3 by the SEC, MSRB. and the National Association of Securities Dealers. The reports called for broad new rules and legislation to shore up disclosure, control political contributions, and improve price dissemination and surveilance.
Testifying before the subcommittee were SEC Chairman Arthur Levitt, Jr.; MSRB Chairman Charles W. Fish; and John Pinto, executive vice president of regulation at the National Association of Securities Dealers.
Markey hinted that the longer regulators take to implement proposed reforms, the broader his legislation may be.
He also cautioned that he wants to see the reforms enacted within a matter of months, not years.
Levitt, whose staff called for hard-hitting reforms in its Sept. 3 report to Congress, agreed. "The clock is running," he said. "Hopefully we will make progress, but if [sufficient progress is not made] in a limited period of time" then legislation will be in order, Levitt said.
One Republican on the panel said he agreed that the time frame for action by regulators should be "very short, " adding that, "Personally, I would hope that Congress would not legislate - that we would not try to micro manage and create additional burdens on business. I think this puts a real burden" on regulators to move, he said.
Levitt said he has encouraged the MSRB to come up with a variety of rule proposals aimed at improving disclosure, curbing political contributions, broadening price dissemination, and establishing better surveilance procedures.
"In the event that this does not occur over the course of the coming months - not the coming year - the Congress and the SEC should use the tools they have available to them to make this happen," Levitt said.
"The subcommittee chairman already has spoken of the importance of legislation in the area of conduit bonds," he said, referring to Markey's statements. "That is something that can be considered immediately," he said.
At a minimum, Levitt said, the retail investor is entitled to have full data about the "the revenue stream of that factory" or other project financed by a conduit bond. "I think that clearly should be a matter of public information. Anything less is an absolute violation of the public trust," he said.
But Levitt told Markey that calling for repeal of the so-called Tower Amendment, the 1975 law that restricts the ability of federal agencies to regulate issuers, is politically "unrealistic."
In other recommendations, Levitt said that the MSRB should require that confirmation statements show the broker dealer's markup in a riskless principal transaction so that customers can better evaluate the price they pay for a bond.
Such a transaction is one where the broker trades from or for inventory and charges a markup or markdown.
Levitt also said the confirmation should tell the customer whether a bond is rated or unrated. "That doesn't suggest we are going to make a judgment on that score, but I think a customer should make that judgment," Levitt said.
He also said the SEC's report on the political contribution practices of roughly 70 municipal dealers will be available within the next month. The agency sent dealers a set of letters June 4 and July 11 asking for detailed information on activities of individuals in their municipal shops.
Levitt said that disclosure involving municipal derivatives, in particular, has been inadequate. He pointed to yesterday's press reports that one of largest buyers of municipal derivatives said he will stop buying them because underwriters are not providing adequate secondary market support or accurate pricing information.
"As pressure [increases] on communities to raise funds in face of citizens' reluctance to authorize bond issues, a whole host of exotic kinds of financings involving derivatives have been employed," Levitt warned.
"I have little sympathy with those who argue against full disclosure," Levitt said. "Disclosure is the bedrock of our federal securities laws.
"Similarly, I have little sympathy for those who keep information about quotes, trades, prices, and markups away from investors. Markets are more efficient, fair, and liquid when investors can readily determine how much a security costs," he said.
Markey was skeptical that the MSRB's recent rule proposals concerning disclosure and other issues will do the job.
"I am concerned that this may turn out to be another victory of form over substance," Markey said. He noted that a chart supplied by the NASD showed that, in the decade ending in 1992, the association, the chief enforcer of MSRB rules, did not initiate a single enforcement procedure under Rule G-20, the board's longtime rule restricting improper gift-giving by dealers.
"If the NASD hasn't brought a single enforcement action in a decade, how likely is it you will be able to be aggressive in enforcing the proposed rule?" Markey asked.
In testimony before the panel, Pinto said the MSRB has never interpreted Rule G-20 to cover the kinds of political contributions currently drawing press attention.
So there have been "problems with the rule all along." Markey said.
"I didn't say that," Pinto responded. "What I said was that the rule was not designed to deal with the kinds of issues that are now being proposed" in the MSRB's new political contributions rule, he said.
Taylor dodged a similar question from Markey on why the board has not taken action to curb political contributions up until now. Markey asked, "Do you believe that there were no problems in 10 years?"
He said Rule G-20 was really a prohibition on commercial bribery, not political contributions. He added that "regardless of what" the NASD has done in the past, the MSRB has now begun to strengthen its rules covering political contributions.
Markey retorted, "You can understand the angled eyebrow we are casting at the likelihood of an enforcement regime that would" aggressively act on these issues.
Markey said his panel plans to continue hearings on the municipal market and will hear from issuers, investors, brokers, dealers, analysts, and bond counsel about the reform proposals laid out by regulators yesterday.
The SEC, MSRB, and NASD and their staffs last week called for broad new rules and legislation to regulate the municipal securities market. The SEC staff was particularly aggressive, saying that Congress needs to enact broad legislation to reform market disclosure, including requiring registration of conduit bonds.
The SEC staff said that unless Congress proposes reform legislation, it will recommend that the SEC issue a legal interpretation making clear that the antifraud provisions of the federal securities laws require issuers to provide ongoing disclosure to the market.
The staff also will recommend that the SEC issue rules barring dealers from recommending bonds to investors unless the issuer has pledged to make available ongoing information about the financial condition of the issuer.
Two steps would keep the staff from making such recommendations. the SEC's report said. One would be congressional legislation giving the agency direct authority to require continuing financial disclosure by issuers. The other would be legislation rescinding the current exemption municipal bonds have from SEC registration and reporting requirements, the staff said.
