WASHINGTON -- Sometimes it's better to start small rather than shoulder a Herculean task that creates more problems than it solves.
That is the message many municipal market participants have been trying to get across to the Securities and Exchange Commission before it finalizes its secondary market disclosure rules later this fall.
The commission should take the idea seriously, but not buy into it wholesale.
The SEC has proposed amendments to its rules that would bar dealers from purchasing or selling bonds unless the issuer had pledged in writing to provide ongoing disclosure, including annual financial information and notices of material events, to a nationally recognized repository.
The proposal also would bar dealers from recommending bonds to investors in the secondary market unless they have reviewed the issuer's financial statements.
But most market participants want the SEC to drop this part of the rule because they fear it is logistically unworkable and could bring the market tO a halt.
Instead, they want the SEC simply to require dealers to review reports of material events that issuers have filed with repositories.
That makes a certain amount of sense because reports containing the 11 items on the American Bankers Association's list of material events, if filed in a timely manner, should give dealers the information they need to decide whether to recommend bonds to investors.
Dealers argue, with some justification, that requiring them to review annual financial statements of issuers each time they recommend bonds to clients could become a logistical nightmare. And others have said that requiring issuers to file annual reports to a repository could bury the Municipal Securities Rulemaking Board and private repositories under some 10 million pages a year, all of them likely to be filed at the same time.
However, requiring dealers to review an issuer's annual statement at least periodically is an important hook that is needed to force issuers to provide basic financial information that the market should have.
Annual statements, while often dull and filled with boilerplate, can provide important information on the financial trends of an issuer -- and long before the report of a material event raises a red flag.
An excellent alternative might be to require dealers to check information on material events each time they sell a bond, but only to review the annual financial information of issuers once or twice a year, rather than at the time of each bond transaction.
That should relieve a potential logjam for brokers, while still providing needed protection for investors.
