WASHINGTON -- The Securities and Exchange Commission's proposals for requiring ongoing disclosure of secondary market information is essential to keep the marketplace liquid, according to a senior SEC attorney.
"Some people have in the past said, 'There are so few defaults in the municipal securities area; how can you [the SEC] be so concerned about something which works?' "said Catherine McGuire, chief counsel to the SEC's division of market regulation.
"There's more to it than just default. There's the risk of default, there's the change in market conditions," McGuire told a meeting here Thursday of the National Association of Independent Public Finance Advisors.
Investors who need to sell bonds before they mature because of some unforeseen event, for example, "need to be able to sell those 'bonds in a liquid and well-informed marketplace," she said.
"Similarly, those mutual funds, which I think have been a real great thing for this market in terms of providing liquidity, they need to be able to stay liquid, and that means that they need to know what they have in their portfolios and be able to asses the value," McGuire said. For example, funds need to know things on a timely basis -- such as, "was a toxic waste dump found yesterday" -- that may affect the value of their bonds, she said.
However, some market participants have raised concerns that the disclosure package will harm liquidity. Last May, for example, Public Securities Association official Terry L. Atkinson said that if the rule becomes effective, "the market, at least in the short term, and personally I believe in the long term, will suffer a tremendous decrease in liquidity." Atkinson, who is vice chairman of the PSA's municipal securities division, made the remark at a PSA-sponsored panel in New York City.
Issuers that do not provide secondary market disclosure will have "zero liquidity," he said.
Atkinson was particularly concerned about a provision that McGuire did not specifically address that bars dealers from recommending bonds to customers unless they have reviewed an issuer's financial statements.
As is typical of commission staff speeches, McGuire was not speaking for the commission or other staff. She said she did not know what the commission was going to include in its final rule, and that the agency's staff has not yet made a recommendation to the commission. She did not specify whether the commission would issue a final rule or repropose it, but other meeting participants said they believe a final rule is just around the corner.
Milton Wells, director of federal relations for the National Association of State Treasurers, said that the commission appears ready to issue a final rule in November and that he hoped there would be an adequate transition period to implement it.
McGuire declined to say how the SEC will respond to comments by the financial advisers group and others urging issuance of a separate role covering conduit financing. The comments said a separate rule is needed because issuers have no control over a private entity that receives the proceeds of an original issue and is the source of revenue 'for the payment of principal and interest on this debt.
"That's obviously something the commission will have to deal with in adopting any final rule," McGuire said. But she also said, in reference to the potential for a separate rule, that "we have plenty of time."
McGuire and her division worked with the SEC's division of corporation finance to develop the disclosure package that was proposed last March.
At that time, the commission also issued a legal interpretation of antifraud provisions of existing federal securities laws, which McGuire said give the SEC authority to regulate state and local issuers. Congress has deemed state and local governments to be "persons" and thus subject to the antifraud provisions.
Interpretative releases "are very rare, because the commission ... rarely interprets the antifraud rules; it more frequently enforces them," McGuire said.
"However, with respect to major entities of law-abiding people, which the municipal securities market has proven itself to be, instead of trying to bring targeted enforcement actions and [instill] fear in the community, the idea is to be more orderly about it and just say what the expectations are up front," she said.
"The idea is that there would be lots of disclosure that's available and that's reflected in the price so that everybody is charged a reasonable, fair price," she said.
The disclosure proposals, which would amend the SEC's Rule 15c212, were not intended to be "intrusive, but there was a real drive to get down to basics ... because our mandate here is the prevention of fraud; it's not to create an alternative disclosure system, it's not to build anything like the division of corporation finance. There's no intention to have anything that would involve SEC staff review," she said.
The commission is relying on independent public finance advisers and others who deal with issuers "to sensitize them to the fact that they have a responsibility to keep ... people who have loaned them money at very low rates of interest informed about the risks so that if there really are big risks, they are not resold to people who are even more gullible as things flow down the food chain," McGuire said.
She also urged the financial advisers group to "think about how you got your business" and whether that is material to what an investor needs to know.