WASHINGTON - An ad hoc group of the Investment Company Institute, the powerful lobbying arm of the mutual fund industry, is developing draft secondary market disclosure guidelines for tax-exempt money market and long-term bond funds.
The effort, which is in part a response to Securities and Exchange Commissioner Richard Roberts's controversial call last year for mandatory disclosure by issuers of variable-rate demand notes, is the latest in a series of projects by industry groups to improve disclosure.
The ad hoc group has two subcommittees. One represents long-term bond funds and is headed by Philip Toia, vice president and director of fixed-income research at the Dreyfus Corp. The other represents money market funds and is headed by Mary Jo Ochson, vice president of Federated Research Corp.
Ms. Ochson recently stepped down as chairman of the National Federation of Municipal Analysts, which was one of the first industry groups to issue voluntary disclosure recommendations for the market.
The task force's voluntary standards could have as much, if not more, influence on the quality of disclosure than the municipal analysts' package, market officials say.
"These are the people who make the actual purchase decisions" at firms, said one official involved in developing the new guidelines.
Commissioner Roberts, in a speech before the institute on Nov. 12, had said the SEC should consider barring money market portfolio managers from buying variable-rate demand notes from issuers who do not pledge to provide the market with ongoing disclosure.
Mr. Roberts wanted the provision included in a set of amendments to the SEC's money market Rule 2a-7 aimed at improving the quality and diversity of bonds bought by tax-exempt money market funds. At the time, the rules were expected to be issued within weeks.
But the revised standards were put on the back burner as a result of President Bush' moratorium on what the administration views as costly new regulations. Amedments to 2a-7 are not expected until after the November elections.
"We want to address Commissioner Roberts's concerns without hurting supply," Ms. Ochson said.
Opponents of the commissioner's approach warn that it unfairly targets only the variable-rate demand note segment of the market and, as a result, could hurt availability of the securities.
"We take his opinions very seriously," she said. "We're trying to figure out how to address his concerns" while remaining within the current regulatory framework.
The project comes as bond analysts become increasingly concerned over sluggish participation by issuers in secondary market disclosure. The analysts group will launch a broad survey in the next few weeks of its 800 members to determine if there have been any improvements in the area. The results could lead the group to press for new regulations mandating improved disclosure, one federation official said.
Victoria Rupp Westall, an analyst with Edward D. Jones in St. Louis and the federation's 1992 chairwoman, was unavailable for comment on the upcoming survey.
"We're disappointed in the response so far" to some of the federation's initiatives, warned Richard Ciccarone, director of fixed-income research at Kemper Securities Group in Chicago and chairman of the federation's standards and practices committee. "We'll be looking to the survey to gauge the level of frustration of other analysts and investors."
He pointed, in particular, to a recent federation recommendation that issuers declare in official statements whether they will or will not supply ongoing disclosure.
"That negative provision is basically the status quo, but nobody will put it in," Mr. Ciccarone said. "It's like a disclaimer statement you see on a pack of cigarettes. Just as smoking may be hazardous to your health, the lack of disclosure may be hazardous to your wealth. People ought to be told about that."
Meanwhile, sources familiar with the task force's plans say the Investment Company Institute's task force is considering recommending that all tax-exempt money market funds have access to six items: a copy of the official statement; a complete final transcript; enough current financial information for the fund to analyze credit risks of a purchase; information about how well the issuer is complying with the terms of the deal; the name, address, and telephone and telecopy numbers of the trustee, transfer agent, or others; and information about any material changes to the deal.
For credit-enhanced deals, the sources say, the task force may say the official statement should summarize the structure and risks of the enhancement and any separate liquidity enhancement. Copies of the current letter of credit or other enhancement, current reimbursement agreement, and any riders should be available.
The task force may also say that current financial information about the credit enhancement provider should be included. The guidelines could spell out what is needed if the transaction provides full substitution of the credit enhancement provider's credit for that of the issuer. The guidelines may say funds should be notified about such changes as a shift in the enhancement provider or a default.
For new issues, parties should be required to provide information to a central repository or to the trustee, who would supply it to a repository, the task force may say. For existing issues, the task force may say that it is impractical to amend the transaction documents. Thus, funds should rely on voluntary disclosure by dealers and trustees.