CHICAGO - One of the SEC's, proposals to improve disclosure in the secondary municipal market could harm individual,investors and "grind the marketplace to a halt," an analyst with a broker-dealer firm said at a meeting in Chicago late last week.
Victoria Rupp Westall, a general partner at Edward D. Jones & Co. in St. Louis, told analysts meeting in Chicago that while she supports improving secondary market disclosure, she opposes a Securities and Exchange Commission proposal to bar broker-dealers from recommending bonds unless they have reviewed the issuer's financial information.
"I don't agree with it. I don't think it's in the best interest of the municipal marketplace," she said.
But Paul Maco, an SEC attorney-fellow who also spoke at the meeting, would not say whether the commission might drop or modify the proposal.
"I can only say that the comments that have been given to us during this process do not fall on deaf ears," he said, adding that the disclosure proposals are all intended to be "reasonable." Maco stressed that these are his views and not necessarily those of the SEC.
Westall said the proposal requiring broker-dealers to review financial information, if adopted, could hurt the very person that the SEC is trying to protect with its disclosure requirements: the individual investor.
She said her biggest concern is that the proposal may create a lack of liquidity for the investors holding the bonds of issuers that fail to disclose financial information. Because broker-dealer would be barred from trading these bonds, she said, investors may be stuck with them. And the investors, she said, are not going to understand why their bonds are no longer liquid.
"They're going to come to and want us to buy those bonds," said Westall. "Maybe we can and maybe we can't. But we know we can't turn around and sell those bonds back into the marketplace." She added, "We, as broker-dealers can't tie up all of capital by buying bonds and holding them in inventory, even if we are allowed to do that."
Westall also worried that the proposed requirement will be so time-consuming and costly for broker-dealers that they will begin trading only the bonds of larger issuers whose financial information is readily available, thereby creating a "tiered" bond market.
Westall and Virginia Rutledge, the chief financial officer of the Orlando Utilities Commission, were concerned about the logistics or mechanics of putting the systems in place to ensure that the proposed requirement could be carried out.
Edward D. Jones, which has offices across the country and about 1.6 million retail customer accounts, averages about $ 10 million in municipal bond sales or 800 bond transactions every day, Westall said. The firm's daily municipal bond inventory averages about $ 40 million and currently includes more than 300 different bond issues.
"I'm not sure we can hire enough people to keep track" of the financial information from the issuers of these bonds under the SEC proposal, she said.
The costs of complying with such a requirement will be huge, and they will probably be passed on to investors, she said.
Rutledge worried that, because the fiscal years of many issuers end on June 30, the repositories may get an overwhelming number of annual reports in December that they will be unable to process in a timely fashion.
Westall complained that the proposal is unfair.
"There is no requirement for the corporate bond trader to review the 10Q or the 10K or the annual report prior to a corporate bond transaction," she said.
Broker-dealers in the municipal market already are required to have a reasonable basis for recommending bonds, she said.
"Requiring us to come up with compliance procedures every time we do a transaction" does not address secondary market disclosure problem and seems to take a micro" rather than a "big picture" perspective of it, she said.
Westall criticized the proposed rule's exemptions, which she worried, would overlook "problem areas" like small conduit bonds and create a standard for small issuers to "hide behind" and stop disclosing any information.
She recommended the SEC consider some alternatives to its proposed rule. One could be to require broker-dealers to periodically review the financial information of issuers, rather than at the time of a bond transaction.
Another possibility, she said, would be to "segment the market" and require broker-dealers to only review the financial information of issuers in certain kinds of transactions, such as those involving nonrated conduit bonds.
"I think we need improved secondary market disclosure," Westall said, "but not at the expense of the credibility, liquidity, and integrity of the municipal marketplace."