WASHINGTON -- If an appeals court declares the Municipal Securities Rulemaking Board's pay-to-play rule unconstitutional, the board will probably propose a "tough" new rule requiring disclosure of political contributions, board officials said yesterday.
Alabama bond dealer William Blount has asked a federal appeals court to overturn the board's Rule G-37, which bars broker-dealers that make contributions to issuer clients from doing business with them for two years afterwards.
The U.S. Court of Appeals for the District of Columbia is scheduled to hear oral arguments in the case on Dec. 9.
But Robert Drysdale, the MSRB's new chairman, said at a press briefing yesterday on the board's upcoming agenda that if the rule is overturned the board will probably propose "a real tough disclosure rule."
Christopher Taylor, the board's executive director, said that while the board would have to review any such court decision, "we're going to be as tough as we can possibly be under the Constitution.
"The board, as a group, feels very, very strongly that the practice of giving money to get business is something that really threatens the integrity of this market," Taylor said.
Both Drysdale and Taylor said the rule should not harm any securities firms. Some minority finance professionals have charged that the rule puts minority- and women-run securities firms at a disadvantage.
But Taylor said, "We had no intention of disadvantaging one group or another, and we don't think the rule does that."
Some small dealers like the role and are convinced it will put them on a more equal footing with the larger firms, Taylor said.
The two officials acknowledged that they have received complaints from some firms that the board's proposal to exempt retail sales representatives would undermine the rule's effectiveness.
But they would not say whether the board will rethink the proposed exemption. "This is one that we're going to have to spend some time on," Drysdale said.
"Who's in and who's out has been a major subject of discussion every time we take up the rule," Taylor said.
Other issues that will probably be discussed at future board meetings include the Securities and Exchange Commission's proposals to improve secondary market disclosure, the board's pilot program to improve price transparency, the T-plus-3 proposal to settle transactions in three rather than five days, and the board's proposal to require broker-dealers to conduct ongoing training and continuing education for employees, Taylor said.
The board's role on secondary market disclosure has been limited to suggesting that the SEC require issuers and other market participants to disclose material events on a timely basis rather than in annual reports, Taylor said.
The SEC has the lead on this issue because it has the ability, under the securities laws' antifraud provisions, to adopt disclosure requirements that affect issuers, he said. The MSRB is prohibited from requiring issuers to do anything, Taylor said.
The board has told the SEC, "we're willing to play a constructive role" here; just "let us know what that rule should be," Taylor said.
Both Drysdale and Taylor said they think there should be one central location for issuers to file annual reports and other disclosure documents, rather than repositories in several or all 50 states.
One of the biggest challenges facing the municipal market is for brokerdealers and their clients to reduce the settlement time for bond transactions from three to five days beginning in June 1995, Taylor said.
The SEC has adopted a rule implementing the so-called T-plus-3 proposal for securities. The MSRB, at the SEC's request, has filed a rule with the commission that would implement the proposal for municipal bonds.
"This is a major, major change for the whole securities industry and for customers' behavior," Taylor said. It's "an interim step" to eventually requiring settlements within one day of a transaction, he said. Taylor said the board will be "closely monitoring" this issue.
Reduced settlement times will be a particular challenge for municipal bonds, Taylor said, because the settlement systems in the municipal market "are not as sophisticated" as those for corporate bonds.
The comparison rate -- that is, the rate at which the trading figures reported by dealers matches up with the figures reported by their counterparties the first day after trading -- is only about 70% for municipal bonds, as opposed to more than 90% for the corporate bond market, he said.
That rate has to be higher, Taylor said, because if the trading figures do not match, the broker-dealer and client have only one day to resolve their differences before settling the transaction on the third day.
Taylor predicted that customers will have more problems with three-day settlements than broker-dealers, but added that small and regional firms could have some problems with the new regime.
He said more customers will probably have to begin trading through cash management accounts with the broker-dealer so that they have easy access to funds, he said.
Another big challenge will be putting in place the board's pilot program to improve price transparency, Taylor said. The board hopes to begin the program in early January, he said.
The board, in the first of four phases of the program, hopes to be able to make daily prices publicly available for 50 to 350 municipal bond issues that are traded four or more times a day between dealers. The board's research indicates that an average of 180 municipal bond issues are traded four or more times a day, Taylor said.
The second phase of the program, which will begin in 1995 if the first phase is successful, would provide prices for bond transactions between dealers and institutional investors. The third phase, to begin in 1996, would provide prices for transactions between dealers and retail investors. A fourth phase of the program will be aimed at getting pricing information more frequently than at the end of the trading day.
The board expects to meet later this week with organizations interested in publishing the pricing figures, Taylor said.
The costs of the pilot program, which are expected to be less than $1 million for startup and less than $750,000 a year for operation, will be paid through subscriber fees, Taylor said.
While most of the 1.2 million of municipal bond issues outstanding in the market trade infrequently, the pilot program "will actually provide real price information on a daily basis" for frequently traded issues, Drysdale said.
