CHICAGO -- Another year has passed without significant new federal regulation of municipal securities, but Washington can still be expected to react swiftly if major problems crop up, a prominent securities lawyer warned bond attorneys yesterday.

"I think it's strictly providence that has kept us from seeing any new significant legislative or regulatory efforts," said Edward Pittman of Brown & Wood. Formerly counsel to the Securities and Exchange Commission's Richard Roberts, Mr. Pittman joined the New York law firm this spring after seven years at the SEC.

Congress has been busy revising the Government Securities Act, he said, and the President's moratorium on new regulations has stalled creation of more rules.

"That is not to say, however, that we shouldn't be concerned or draw a message from some of the significant fines that have been leveled in the government securities dealer cases this spring or from the fact that very tough new investment adviser legislation was adopted as a result of scandals involving municipalities," Mr. Pittman told attendees at the National Association of Bond Lawyers' annual bond attorneys' workshop here.

"The message is that these guys in Washington are going to react very strongly to scandals involving public funds," said Mr. Pittman. "And we're fortunate that we're blessed with a market the past couple of years that hasn't had major scandals, because that is going to be a significant factor to Washington."

He said the municipal market remains "fertile ground" for regulatory agencies like the SEC to develop new legal strategies.

Mr. Pittman noted that for many years the SEC's enforcement program has virtually ignored the tax-exempt market. But this spring and part of last winter, officials with the Internal Revenue Service, the Treasury Department, and the SEC met to discuss sharing information and resources in the prosecution of securities and tax law violations.

In addition, the SEC, for the first time in 50 years, has access to over 22,000 official statements that are now in the Municipal Securities Rulemaking Board's new repository, Mr. Pittman said.

"And the role of the MSRB is evolving," Mr. Pittman said. "While during the last decade and in the 1970s they were preoccupied with developing industry standards, I think they are going to become more active players in enforcement in the next decade to come."

The MSRB has already been examining official statements to look for questionable transactions, he said.

"And I understand they've been talking to the NASD recently," he noted. "Just a word of advice. If you haven't been sending those official statements into the MSRB's repository, I think you are going to see some very strong actions against dealers in the upcoming months because they are turning names over the National Association of Securities Dealers.

He added that "the NASD has shown that it is willing to bring actions where it's going to levy large fines and make examples of dealers that aren't complying with MSRB rules."

"I think the SEC has indicated in the past year that it's going to react very strongly to unethical practices in the municipal market," he said.

He pointed to an SEC action this summer against a Kentucky infrastructure official, reports that the agency is investigating First Boston Corp.'s handling of a $1 billion New York City bond offering, and an SEC action last month against a Merrill Lynch research analyst charged with "scalping." That is the practice of secretly investing in a security, recommending it to a customer, and then selling it.

He noted that in the Kentucky case the SEC said the official breached his duty to the issuer, not to the bondholders. Traditionally, insider trading charges stem from a breach of fiduciary duty to shareholders in a corporation, he said.

"Well, the SEC can't use that theory here because most courts have said that the issuer does not owe a fiduciary duty to the bondholders," he said. "So this looks like the avenue the SEC will use in the future."

He suggested that bond lawyers talk to their clients about setting up specific practices for handling information about pending offerings.

Mr. Pittman said two factors will "increase exponentially" the chance that regulators are going to bring enforcement action against a market participant -- controversy and the press.

"The fact that your client's name is in the press means that every enforcement attorney in the commission is going to have a copy of the press release on his desk because they get daily news clips," he said.

He said there have been some recent noteworthy enforcement actions, including the NASD's finding that dealers in a transaction involving the Marengo County, Ala., Port Authority failed to perform due diligence. He also pointed to a recent deal that was halted and that involved escrowed-to-maturity bonds that would have been redeemed before maturity.

Commenting on recent proposals by Commissioner Roberts, Mr. Pittman disagreed with his former boss' call for setting formal standards for rating agencies. He said there is no clear picture of the benefits of additional rules or how they would be implemented.

He was more sympathetic, however, to Mr. Roberts' recent call for tighter rules for brokers selling unrated and conduit bonds to retail investors.

"I don't necessarily agree with all of those proposals, but I think he is right that more attention needs to be focused on the individual broker that is recommending transactions to investors," he said.

"No matter how good the disclosure documents are, it's the broker that is probably in the best position to understand the risks of these transactions," he said. "And he's the one obligated to know something about the investors and to make sure the transactions are suitable."

Mr. Pittman moved next to the MSRB's recent decision to add the official statements for short-term note offerings and variable-rate demand obligations to those that are required by the board for its central repository. Even though the plan was strongly opposed by NABL, it is likely to be approved by the SEC, which is expected to seek comment on the plan shortly, he said.

Finally, he spoke of the American Institute of Certified Public Accountants' recent efforts to restrict the availability, in the case of tax-exempt deals, of comfort letters offering certain assurances from accountants. Although the institute has backed off the plan to some extent, Mr. Pittman said it is an "ill-conceived" proposal and should be dropped.

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