WASHINGTON -- Municipal broker-dealers should take into account issuers' annual financial information when recommending their bonds to investors, Securities and Exchange Commission member Richard Roberts said yesterday.
Roberts' remark, made in a speech to the Institutional Investors Fixed-Income Forum in New York City, reflects what several bond lawyers and analysts have been saying about the SEC's new secondary market disclosure rules.
The rules do not require broker-dealers to review the annual financial information disclosed by an issuer before recommending its bonds. But market participants have focused on an SEC release explaining the rules that suggests that such information must be taken into account if dealers are to comply with Municipal Securities Rulemaking Board rules and the securities laws' antifraud provisions.
The SEC had proposed secondary market disclosure rules last March that would have barred broker-dealers from recommending bonds unless they had first reviewed an issuer's financial information.
But most market participants complained the proposed requirement would hurt liquidity and investors and could even bring the market to a halt.
The final rules that were adopted by the SEC last month scaled back the proposed requirement and instead call for broker-dealers to have in place by Jan. 1, 1996, the systems and procedures needed to monitor notices of material events that could affect bonds.
Roberts told those attending the forum that, "in my opinion, compliance burdens in connection with the adopted rule should prove to be minimal and the market's liquidity should not be adversely affected."
"However," he said, "annual financial information disseminated into the marketplace should be taken into account by dealers in making recommendations to investors in order to meet their obligations under the [Municipal Securities Rulemaking Board's! fair dealing and suitability rules."
The SEC rules bar broker-dealers from underwriting municipal bonds as of July 3 of next year unless they have "reasonably determined" that the issuer has agreed in writing to provide ongoing disclosure of annual financial information and notices of material events.
On another matter, Roberts said the SEC issued a concept release in September seeking comments on nationally recognized statistical rating agencies (NRSROs) because these agencies have flooded the SEC in recent years with requests for assurances that their ratings could be relied on, or taken into account, by broker-dealers and issuers under certain SEC rules.
The concept release seeks public comments on whether the SEC should establish formal procedures for designating and monitoring credit rating agencies as NRSROs. It also asks for comments on how much the SEC should rely on NRSROs and their ratings in commission rules.
These inquiries are important, the SEC said, because the commission has increasingly written rules that refer to NRSROs and the ratings they issue.
The commission began referring to such ratings more than 20 years ago in modifications to its net capital rule for broker-dealers. The commission said broker-dealers could take into account ratings from NRSROs in determining the liquidity of their securities under the net capital rule.
Since then, the SEC has included or referred to NRSRO ratings in many of its rules.
One of the most recent examples is a proposed municipal bond rule that would have required broker-dealers to disclose in a confirmation when a bond is not rated by an NRSRO. SEC commissioners deferred consideration of that rule last month after the staff recommended that the MSRB rather than the SEC propose such a rule.
The SEC's increased reference to NRSRO ratings in its rules has prompted the rating agencies to besiege the SEC for "no-action letters." Such letters would assure the rating agencies that the commission would not take action against a broker-dealer or issuer that took an agency's ratings into account in following certain SEC rules.
