WASHINGTON -- A recent proposal by Securities and Exchange Commissioner Richard Roberts aimed at improving secondary market disclosure for short-term municipal debt is opposed by the Investment Company Institute.
Lawrence Rogers, ICI's general counsel, wrote to Mr. Roberts earlier this month warning that the proposal mentioned by the commissioner at an ICI luncheon Nov. 12 is inefficient and would competitively disadvantage tax-exempt money market funds.
Mr. Roberts said in November that he urged the SEC staff to add a provision to the agency's money market rule 2a-7 that would bar portfolio managers from buying variable-rate demand notes from issuers who do not pledge ongoing disclosure.
He said the need for current information was highlighted by problems experienced by tax-exempt money market funds holding variable-rate demand notes insured by Mutual Benefit Life Insurance, which was seized by New Jersey insurance regulators earlier this year following a run on the insurer's assets. Variable-rate bonds that were insured by the company immediately became illiquid.
Mr. Roberts's concept has drawn strong support from Wall Street, opposition from at least one major issuers' group, and a mixed reaction from bond analysts. In addition, the chairman of an ICI task force that recommended new rules for tax-exempt money market funds earlier this year said Mr. Roberts's proposal is "apt to work" and suggested a phased-in approach.
But the ICI's general counsel said, "We believe that restrictions on only one segment of purchasers of municipal securities, namely investment companies, seems to be a less efficient means of imposing disclosure obligations than direct regulations of issuers of these securities.
"In addition, imposing the purchase restrictions only on tax-exempt money market funds would place them at a competitive disadvantage vis-a-vis other investment products" he said. "Therefore, the institute believes that this approach would not be an appropriate one to address this important issue."
But Edward Pittman, an aide to Mr. Roberts, said Friday that any objection to the plan is premature because the proposal has not been made available for review. It is a little early "for anyone to be conjecturing on how it will or will not work."
"In order to be able to fulfill their responsibilities to monitor credit quality of money market portfolios, directors need to have access to some kind of continuing information about the issuers of variable-rate demand notes," Mr. Pittman said. "That's the thesis of the proposal."
He said it is probably Mr. Roberts's preliminary view that any rule imposed probably would not have any significant effect on the supply of variable-rate demand notes available for purchase. A concern of some critics is that a secondary market provision could dry up supply of variable-rate demand notes, since generally they do not provide for such disclosure.
Meanwhile, a former SEC official Thursday predicted that Mr. Roberts's provision will not make it into the final rule for money market funds. "I don't think it's likely that that proposal will be adopted," said Kathryn McGrath, former chief of investment management at the SEC and currently a partner at the Washington law firm of Morgan, Lewis & Bockius.
Ms. McGrath, who was speaking at an industry conference on municipal money market funds in New York, said it is more likely that the SEC will want to monitor the progress industry trade groups make with voluntary efforts to improve disclosure before taking action. The agency also would want to monitor the impact of the Municipal Securities Rulemaking Board's proposed secondary market disclosure library.