WASHINGTON -- The SEC's disclosure rules should require disclosure to the market of time-sensitive events but not annual reports and other periodic information, the Municipal Securities Rulemaking Board said yesterday

"The board believes that more work [by regulators and market participants] will be needed before a comprehensive system for periodic information can be implemented," MSRB chairman David C. Clapp said in a 13-page comment letter to the Securities and Exchange Commission.

Accordingly, "the board believes the commission should exclude periodic information from the scope of the proposed amendments until certain practical difficulties can be addressed," he said.

Clapp was commenting on a two-part rule proposed by the SEC on March 17. The role would bar dealers from underwriting bonds unless the issuer has pledged in writing to provide ongoing disclosure to a nationally recognized information repository. It also would bar dealers from recommending bonds to customers unless they have reviewed a municipal bond issuer's financial statements.

Clapp said that over 70,000 issuers produce a broad variety of documents with information "potentially relevant to the value of outstanding municipal securities." But there tends to be little consistency in the content, format, and timing of the documents, he said.

Additional standardization of disclosure documents is needed before any system can "produce net benefits for the market," Clapp said. Otherwise, issuers may inundate repositories with a "flood of long, marginally useful documents" that would make it impossible for the data banks to disseminate the information in one day, as suggested by the SEC in its proposed role.

The joint recommendations on disclosure that 12 market groups made to the SEC in December are an "excellent starting point" for developing more detailed voluntary guidelines, which could be endorsed by the commission, Clapp said.

"With the commission's support, it is likely that quick progress could be made in developing voluntary standards for content, format and timing of periodic disclosure," he said.

Clapp warned that requiring dealers to review periodic documents before recommending secondary market securities would "severely limit the liquidity of many issues and tend to harm the current investors much more than it would protect potential investors."

As an alternative, Clapp recommended that the SEC dust off a set of requirements that the MSRB drafted last August. They were set aside when the SEC announced it would develop its own rules on the issue.

The two-part MSRB standard would require dealers to disclose to customers, and to include on confirmations, whether the issuer had committed to provide disclosure. It also would require dealers to disclose how the marketability of the bonds would be impaired by lack of continuing disclosure.

"The board could adopt rules requiring underwriters to explain to issuers the importance of meeting specific, commission-endorsed disclosure standards and rules requiring dealer disclosure to customers of issues that are not in conformance therewith," Clapp said.

But successful implementation of such a rule would hinge on a "cooperative industry effort" to develop voluntary continuing disclosure standards, he said.

Clapp said it is "critical" that at least one information repository have a comprehensive stream of material events notices. "If this capability does not exist, market participants may be forced to subscribe to all repositories to ensure that they are informed of all material events -- an inefficiency that would work against the proposed amendments.

"The board believes that the approach taken by the proposed amendments will work well for material events notices as long as efficient, timely, and equal access to the notices can be assured," Clapp wrote.

The easiest and most workable method would be for the commission to provide for a central facility to receive all material events notices, the board said. "Information vendors can, in turn, quickly retransmit the notices to all interested parties in the market."

PSA chairman R. Fenn Putman warned in a July 25 comment letter that if dealers had to review lengthy annual reports before they can recommend bonds, they would be forced to stop trading in the securities of an issuer until they have reviewed the document. That would freeze the market for that issuer's securities regardless of the nature of the information contained in the document, he said.

Putman urged the SEC to drop the second of its two-part proposed rule that would require dealers to review documents before recommending bonds to customers.

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