Given the industry's voluntary efforts, Securities and Exchange Commissioner Richard Roberts said yesterday that at present he no longer sees a need for mandatory secondary market disclosure.
However, he expressed bitterness that bond lawyers are not pushing harder for their issuer clients to pledge ongoing disclosure in official statements.
In a speech before the Bond Buyer Municipal Finance Conference in New York City, Roberts said he is "prepared to give voluntary efforts more time."
He added, "I say this in recognition of the voluntary efforts on the part of many participants in the municipal securities market to improve secondary market disclosure."
Issuers of municipal bonds, even high-risk bonds, are currently exempt from filing quarterly and annual reports and registering their offerings with the SEC. Roberts has said repeatedly during his first two years with the agency that it may be time for Congress and the SEC to reconsider whether higher-risk bonds should continue to be exempt from registering with the SEC.
But yesterday he said there is continued improvement in secondary market disclosure thanks to the voluntary projects of the Government Finance Officers Association, the American Bankers Association, the National Federation of Municipal Analysts, the Public Securities Association, and other groups.
Members of the analysts federation may not share Roberts' views on federal action. Most of those questioned in a survey the group released earlier this week voiced frustration with low levels of secondary market disclosure.
Three-quarters of the analysts polled in one part of the survey supported issuers being required to provide annual or quarterly reports to the marketplace, although they did not favor registration of bonds or content requirements for their reports.
Meanwhile, Roberts said bond lawyers need to start pushing their clients to provide secondary market disclosure. "I challenge the municipal securities legal community to adopt an open, positive mind with respect to secondary market disclosure," he said.
"While I too wear tasseled loafers, it often seems to me that lawyers are against everything and for nothing," he said. "I must say that the reaction of the securities bar is so consistently negative towards anything advanced by the regulators that their comments are often discounted, other than in the technical arena."
Roberts was speaking of what has emerged as one of the touchiest issues in secondary market disclosure, which is to what extent bond lawyers should actively press their issuer clients to pledge ongoing disclosure in official statements.
Many lawyers worry that if their clients pledge ongoing disclosure, they will expose themselves to legal liability if the disclosures end up inaccurate or incomplete. On the other hand, if they make no pledges in the first place, they likely face no legal problems if their clients' circumstances change.
But Roberts warned that "concerns about the legal liabilities of issuers disclosing information to the secondary market are not a legitimate reason for slowing the voluntary progress that already is under way."
"Each day, both corporate and municipal issuers talk to analysts, issue press releases, make speeches, and engage in other activities that reasonably can be expected to reach investors," Roberts said. "The one requirement imposed by the general antifraud provisions of the federal securities laws is that when issuers speak, they speak accurately and completely."
"I do not view the voluntary, organized presentation of information to the secondary market as a source of greater liability for issuers than they already encounter," he said. "If there are liability issues that need to be addressed, those issues should be placed in their proper perspective and should not become an impediment to improving voluntary disclosure efforts."
The National Association of Bond Lawyers has stated it strongly endorses improved secondary market disclosure. But it has remained neutral over to what extent bond lawyers should be push clients on the issue.
The group is reviewing its stance this year as it revises its handbook on disclosure, "The Disclosure Roles of Counsel."
In other comments, Roberts continued to push for tighter regulation of the sale of higher-risk bonds to retail investors.
"I have in the past recommended that the commission adopt a rule requiring broker-dealers to make an express written suitability determination when recommending transactions in certain municipal securities to retail customers," Roberts said. "However, if there exist other, less intrusive methods of reducing risks to investors, then I am more than willing to consider those alternatives."
At a minimum, he said, the Municipal Securities Rulemaking Board should eliminate a rule that says dealers can sell bonds to customers whose backgrounds are unknown as long as they have "no reasonable grounds" to think the bonds are unsuitable.
Also in his speech, Roberts said the SEC will continue a recent trend toward more enforcement action in the municipal arena. He said municipal securities participants "should tailor their behavior accordingly."
He pointed to the agency's first insider trading case in municipals last June, which was against N. Donald Morse, former secretary and treasurer of the Kentucky Infrastructure Authority. He also cited the agency's case in August against former Merrill Lynch analyst Edward L. Scherer, who was charged with "scalping" bonds backed by Executive Life Insurance Co. guaranteed investment contracts.
In scalping, an investor adviser personally invests in a security before recommending it to a customer. But the adviser falls to disclose that fact to the customer. The adviser then sells the security as a result of his recommendation.
Roberts also noted that Donaldson, Lufkin & Jenrette last month settled SEC charges that it failed adequately to review the questionable business dealings of Matthews & Wright for which it conducted an initial public offering.
"With the Morse insider trading' case, the Scherer ~scalping' case and the DLJ ~due diligence' case, a clear pattern has emerged," Roberts said. "The commission's division of enforcement has focused more attention on the municipal securities market."
"Municipal securities participants, if they were not already, should be aware of this increase in enforcement attention and should tailor their behavior accordingly," he said.
"Securities law violations in the municipal area, when uncovered, will be pursued diligently by the commission, and the commission is exercising extra effort to discover such violations," Roberts added.