WASHINGTON -- The Municipal Securities Rulemaking Board is scheduled to take its first hard look today at Securities and Exchange Commissioner Richard Roberts's recent proposal that brokers selling risky bonds be required to specify in writing if the securities are suitable for retail customers.
Commissioner Roberts had recommended in a series of speeches beginning in February that the MSRB require brokers selling conduit or nonrated bonds to retail buyers to put in writing at the time of sale why they think their recommendations are suitable.
The MSRB began discussing Mr. Roberts's recommendation this spring after the SEC's market regulation director, William Heyman, urged the board to take a position on the issue. But the board delayed a full airing of the controversial subject until its three-day quarterly meeting that starts today, when it is scheduled to discuss a series of options raised by Mr. Roberts and Mr. Heyman to deal with sales of more speculative bonds.
Board officials, including Chairman Richard Thayer, vice president of First Union Brokerage Services in Atlanta, were traveling to the meeting yesterday and could not be reached for comment on how the board plans to tackle the issue.
Meanwhile, the Public Securities Association announced this week it is gathering data on defaults involving unrated and conduit bonds to "help frame the issue of strengthening customer suitability requirements." The group says it is analyzing default data by state, type of issuer, size of issue, and use of proceeds.
Mr. Roberts has argued that 75% of the total dollar amount of municipal defaults in the last five years, excluding the $2.25 billion default of Washington Public Power Supply System bonds, has occurred in unrated and conduit bonds.
"We plan to go back several years," said PSA Vice President George Brakatselos. "We have data bases that keep track of defaults to some extent already. We'll be augmenting those," he said, noting that the group will contact dealers and issuer groups. He said the PSA hopes to complete its review by this fall.
Commissioner Roberts said Monday, "I'm anxious to hear the results of whatever discussions take place on this. I have a great deal of confidence in the MSRB. They've indicated that they will begin serious consideration of the issue and I'm confident that they will do that.
For now, he said he will take a back seat to the board on the issue.
"For my part, for the short term, I merely intend to encourage them to continue their consideration" of this.
The PSA's plan to provide data to the board was first discussed at a visit to Mr. Roberts's office earlier this year by three members of PSA's board of directors - Gregory Menne, vice president and director of fixed-income for A.G. Edwards & Sons Inc.; David Thompson, president and chief executive officer of Griffin, Kubik, Stephens & Thompson Inc.; and R. Fenn Putman, managing director of Lehman Brothers.
In a related matter, the National Federation of Municipal Analysts, concerned about the lack of secondary market disclosure in the municipal market, particularly for risky bonds, is circulating a four-page survey to its 750 members on the issue.
The survey asks analyst to identify the three categories of issuers that generally provide the best and worst secondary market reporting and disclosure. Among the 18 categories listed are long-term health care, state and local housing, special district, hospitals, and industrial development revenue.
Analysts are asked to describe the secondary market disclosure problem as anywhere from "essentially eliminated" to worsened substantially."
"Do you believe that issuers should disclose in the introduction [to the official statement] whether or not the issuer or its agent will provide secondary market information?" the analysts ask, referring to a controversial recommendation made by the national federation last year.
The survey asks analyst how often in the last year they have seen an issuer disclose its periodic reporting intentions, ranging from "almost always" to "almost never."
In a key question, the survey asks how often the firm rejects or requires additional yield from issuers that will not provide secondary market information. Market participants say until major buyers begin penalizing deals that do not pledge ongoing disclosure, little progress will be made in the area.
The group also asks how analysts would feel about various SEC requirements, such as forcing issuers to disclose whether they intend to provide periodic reporting, requiring issuers to actually provide periodic reports, and making issuers register their offerings. Analysts are also queried on what they would think if municipals were regulated in the same way as corporate securities.