ATLANTA -- A provision in the SEC's proposed disclosure rule, which would bar dealers from recommending bonds to customers is an issuer failed to provide promised information, could halt trading in certain bonds, a top industry official said Friday.
"This is inviting a situation where you are going to shut down the market for bonds," Micah Green, executive vice president of the Public Securities Association, told a PSA seminar held here to discuss the Securities and Exchange Commission's proposals that are designed to improve municipal disclosure.
Green's comment was the the first major objection raised by the PSA to amendments the SEC proposed March 9 to its disclosure Rule 15c2-12.
The SEC's rule would bar dealers from underwriting bonds unless the issuer has pledged in writing to provide ongoing disclosure to a nationally recognized repository. Issuers would have to provide annual audited financial statements at least once on year, for instance. And they would have to state in writing the date that the document will reach the repository.
The rule also says that dealers must "review" the information that issuers have pledged to provide before they recommend to their secondary market customers that they buy or sell bonds.
"If the SEC is saying that the dealer can't recommend the bonds if the issuer is in noncompliance, what is the market effect of that?" Green said in a telephone interview yesterday. "What is the effect on the issuer and on the outstanding investors? I think it's our obligation as the association representing dealers to point those things out [to the SEC] and to try to develop alternatives."
One alternative, said one dealer who asked not to be identified, would be to require dealers to disclose to investors that an issuer has missed making a filing as opposed to barring the dealer from recommending the bond.
Christopher Taylor, executive director of the Municipal Securities Rulemaking Board, who spoke at PSA's seminar Friday, said that dealers will not be able to recommend bonds to customers if issuers do not provide the disclosure they have promised.
"If the information that is supposed to be there is not forthcoming, the dealer may not [recommend] the securities. For example, if the issuer fails to produce an annual report within the time frames that it said it would," then the dealer cannot recommend the bond to a customer, Taylor said.
Robert Colby, deputy director of the SEC's market regulation division, said in a telephone interview yesterday that Taylor's interpretation of the statement is correct.
"If the issuer said it would provide an annual financial statement within nine months of the end of the fiscal year and at the end of nine months does not provide it, it's impossible for the dealer to review it. The dealer, therefore, couldn't recommend it," Colby said.
While the rule bars the dealer from recommending a bond where there is inadequate disclosure, Colby said it does not necessarily preclude a dealer from actually selling the bond.
If the customer came in and said that this is the bond he or she wants to buy, the dealer might be able to sell it, as long as the dealer did not make a recommendation, Colby said. He noted, however, that most bonds are sold because a dealer recommends them.