The Securities and Exchange Commission's new municipal securities watchdog is urging market participants not to overreact to the agency's push for improved primary and secondary market disclosure.
"There are several ways to [respond] to these current initiatives," said Paul Maco, who joined the SEC in March as attorney fellow in the Office of the General Counsel.
"It's easy to whip our colleagues into a frenzy over dramatic and perhaps even absurd results that will occur if some of the proposed measures are looked at in the extreme," Maco said Monday in New York City at a conference sponsored by The Bond Buyer on the SEC's new disclosure initiatives.
"I don't think it's the intention of the commission to apply any of these measures in the extreme," said Maco, a former bond lawyer with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo in Boston. "We can advance the dialogue if we [apply] a standard of reasonableness."
Maco said there are may things that need to be considered before anything is issued in final form. "Now is the time, working together, to sort these problems out," he said, urging market participants to file comments on the proposed rules.
For instance, Maco said, "It's been said that now that some broker-dealers have just downsized their own analyst staff because their major markets -- the funds -- do their own work, [and now] the commission comes along with a rule that will require that many broker-dealers go hire a bunch of analysts. The methods and costs [of complying] concern many."
Other market participants warn that certain large issuers are notoriously late in getting out their annual audit, Maco said. "How can they maintain portfolio liquidity when a large portion may suddenly and unpredictably turn illiquid?"
"Will the market now be broken down into multiple markets with varying degrees of liquidity?" Maco asked. The real question may be whether certain bonds are already essentially illiquid, and will they just become more readily identifiable as such, he said.
Maco said he finds particularly "beguiling" those issues involving the overlap of disclosure and political speech.
"'You've seen our city council members on the evening news,'" he said, quoting an imaginary city administrator. "'How in the Sam Hill do you expect me to control the statements of that bunch?'"
"Or, I've got an issuer that has three different constitutionally mandated officers each producing their own financial reports and those reports almost always conflict. How can I possibly keep them from violating the antifraud rules in the secondary market?
"Unsolvable problem. Well, perhaps...," Maco said. "But somehow a solution to this conundrum was found when the bonds were first issued, or I hope so. Perhaps it solves the problem this time around, too."
The case of the "hyperactive council members" also may "lose some luster," he said, pointing to a recent article by Stanley Keller, a bond lawyer with Palmer & Dodge in Boston. Keller noted that corporations, which have long been aware of the antifraud statutes, disseminate their financial reports without giving up aggressive product advertising.
Maco lauded voluntary market efforts to improve disclosure, including the National Federation of Municipal Analysts award of recognition program, which has recognized 424 issuers to date. "This total breaks out into eight states, 26 state agencies, and -- surprising for those who claim that continuing disclosure will be a burden for the small guy -- 390 local issuers."
But Maco said the statistics suggest that the market is still lagging in terms of disclosure. "The small number of states and state authorities [on the NFMA's list] is striking," he said.
Maco's comments referred to the rule that the SEC proposed March 9 that would bar dealers from underwriting bonds unless the issuer has pledged in writing to provide ongoing disclosure to a nationally recognized repository.
Dealers are particularly concerned about a provision in the rule that would bar them from recommending bonds to customers unless they have reviewed a municipal bond issuer's financial statements.
On March 9, the agency also issued a legal interpretation that warns issuers that their disclosure documents are subject to the antifraud provisions of the federal securities laws. It lists a number of improvements that issuers need to make in terms of disclosure, such as better reporting of conflicts of interest and their financial accounting methods.
The interpretation also lists 11 current events that issuers should strongly consider disclosing to the market, such as unscheduled draws on reserves. Comments on the rule and legal interpretation are due July 15.
The SEC also proposed a rule that would required dealers to disclose in their confirmations if a bond is unrated and what the price markup is on riskless principal transactions. Comments are due June 15.
Dealers are warning that if the SEC proceeds with its secondary market disclosure rule as proposed, the municipal market will dissolve into a multi-tiered market in which many bonds are illiquid. Issuers also are raising a host of concerns, including fears that state bond banks and bond pools could be crippled by the secondary market disclosure standards.
In other comments at The bond Buyer conference, Jeffrey Green general counsel of the Port Authority of New York & New Jersey, said the SEC should consider giving the market five years to ease into the new disclosure requirements. Such a transition period would not be unheard of considering that it has taken the SEC roughly 10 years to get its electronic database for corporate disclosure, or EDGAR, up and running, Green said.
"We must be very careful that the transition rules that the SEC comes up with meet the needs of the market," said Green.
Charles Miers, assistant vice president of Allstate Insurance Co., said he thinks a two to three-year transition period would be valid. But he said it is "not out of bounds" to call for five years. "The volume of information called for [by the SEC's initiatives] is tremendous. The cost is real," he said.
"Five years is a very long time," responded Elisse Walter, SEC deputy director of corporation finance. "I don't think we know enough yet" about the effects of the commission's rules to make that determination, she said, noting that very few comments have arrived at the agency so far.
She said that the SEC is committed to bringing market participants on board as fast as practical. "Obviously, [that's] not when the rules hit the Federal Register," she said.
"We are very serious about going forward with these initiatives," Walter said. "But we are also equally serious about going forward with something that works. If you don't like [something], tell us what you think would work. I don't think the commission will back off the basic notion. But the commission and staff clearly are willing to make changes to make the system work."