WASHINGTON -- Two important questions are hanging over the municipal bond market.

What ideally should federal regulators do to improve secondary market disclosure and prevent dealers from bribing issuers of negotiated bonds with political contributions? And what will the regulators eventually do when faced with political reality?

Since the answers to both questions would exceed the length allowed for this column, let's deal with the ideal this week and reality next week.

In the best of all worlds, Congress and the Securities and Exchange Commission should take a "full disclosure" approach to municipal securities, making as much information as possible available to the investing public.

That means, of course, that Congress should repeal the Tower amendment, which prohibits the SEC from requiring state and local issuers to register their securities and generally protects issuers from being told what to disclose. Tower is hopelessly outmoded in this fast-paced era when all financial markets are inexorably linked and need to be regulated with consistency and continuity.

Congress also should make all municipal market participants, including issuers, subject to the same negligence standard that applies to many other markets and would scrap the current fraud standard, which is extremely hard to prove.

In place of Tower, Congress and the SEC should give the Municipal Securities Rulemaking Board authority to regulate disclosure by issuers and set up reasonable and manageable standards, requiring them to file both official statements and continuing financial reports with the MSRB's electronic library.

Some argue that mandatory disclosure should apply only to private-activity, unrated, hospital, and industrial development bonds -- categories that have been the most prone to problems. Regular and frequent issuers should be exempt, many argue.

But any issuer can have problems. The crises the market faced because of New York City in the 1970s and the Washington Public Power Supply System in the early 1980s are prime examples of why there should be no exemptions.

Giving the MSRB authority to regulate disclosure by issuers also offers a solution to the problem of political contributions made in conjunction with negotiated deals.

An outright ban on contributions or controls on dealers alone won't work because other participants, such as attorneys and credit enhancers, can be used to circumvent the limits.

Instead, the SEC should give the MSRB authority to require issuers to disclose any political donations that may influence the selection of an underwriter, and to require that disclosure of the contributions be included in the official statement for any immediate issue and filed each quarter with the MSRB's information library.

Requiring full disclosure is the best thing Congress and the SEC could do to protect investors and maintain confidence in the municipal market.

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