Orange County, Calif., should have disclosed sooner than its multibillion investment pool was having financial troubles from derivatives and leveraged investments, Securities and Exchange Commission chairman Arthur Levitt indicated yesterday.

"I think events might suggest that," Levitt told reporters after speaking at a Public Securities Association conference on municipal bond disclosure in New York City.

Levitt's remarks come one day after federal regulators and market participants said that county officials may have run afoul of the securities laws, antifraud provisions by failing to fully disclose its financial troubles and the risks associated with some of its investments to investors and pool participants.

Levitt refused to confirm reports that the SEC is investigating the county's disclosures or the securities firms that sold the county derivatives, structured notes, and reverse repurchase agreements.

The county, which filed for bankruptcy Tuesday, seemed to dominate the PSA conference, whose focus was supposed to be the SEC's new secondary market disclosure rules for the municipal market.

"When's the last time a major issuer was AA-rated, put on Credit-Watch, and filed for bankruptcy in the space of four days?" one of the conference speakers asked a reporter, porter, requesting anonymity.

Levitt told reporters at the conference that he does not expect the SEC to take action to prevent Wall Street firms from liquidating securities or taking other actions that could hurt the pool.

In his speech opening the conference, Levitt applauded the municipal market for its calm reaction to Orange County's problems, which he said were "significant" and may cause grief and loss to many people."

"I would hope that a balanced and calm approach to the problems in Orange County will continue," he said.

Orange County concerns prompted ed SEC commissioner Richard Roberts, who also spoke at the conference, to urge securities firms and financial advisers "to take some reasonable steps to make sure that whatever financial instruments you are recommending or marketing are appropriate for an investor and consistent with their investment philosophy."

"Too often it appears to me that compensation, the profit margin, is what is driving the creation of some of these exotic instruments. You are left with the notion that they appear to be concocted more in a boiler room than a conference room," he told reporters.

Roberts also said he is concerned that "there's been a great deal of discussion from members of the securities industry and others that a number of the financial instruments being sold and strategies being marketed do not involve a 'security' and therefore do not fall under the umbrella of the securities laws and its antifraud provisions."

"I have always had an expansive view of the definition of 'security' and my view appears to be prevailing at the commission these days," he said.

Roberts urged state bond issuers to consider marking to market pooled securities on a daily basis. He also said issuers should re@ member that "higher than average rewards are usually accompanied by higher than average risks" and that, with any heavy involvement in securities, "cash is key" and "lack of liquidity can mean death."

The PSA, meanwhile, issued a statement on Orange County aimed at calming municipal bond investors.

The municipal bond market is "fundamentally sound" and municipal governments are not going out of business," Heather Ruth, the PSA'S president, said in the statement. As facts unfold [about the Orange County situation!, the impacts will become clearer," she said.

Ruth said that the PSA'S conference on the SEC's new secondary market disclosure rules illustrates that market participants are working to improve the bond information that is available to investors and to maintain their confidence.

At the conference, Jeff Green and Fenn Putman said that while the SEC secondary market disclosure rules apply only to bond offerings done as of July 3, 1995, within two years the rules will affect 80% of the outstanding bonds in the market.

This is likely because once a large issuer like New York City discloses annual financial information, analysts and traders will rely on that information for all of its outstanding issues, said Green, general al counsel for The Port Authority of New York and New Jersey, and Putman, chairman of the PSA and a managing director at Lehman Brothers.

Putman said the PSA plans to develop a model contract that issuers can use to commit to ongoing disclosure.

The SEC rules bar broker-dealers from underwriting bonds as of July 3, 1995, unless they have "reasonably determined" that the issuer has agreed in writing to provide ongoing disclosure of annual financial information and notices of material events.

Robert Colby, deputy director of the SEC's division of market regulation, said that once a broker-dealer is satisfied that an issuer has made such an agreement, it is no responsible for ensuring that the issuer meets the terms of the agreement.

The broker-dealer would probably not be able to recommend that the issuer's bonds, however, if the issuer failed to follow the agreement, panel members said.

Putman said the rules should not lead issuers to reduce the amount of key information that is in their official statements for primary offerings. The rules use official statements as a disclosure benchmark by requiring issuers to annually update the key financial and operating information that is in them.

Joanne Mays Becker, senior vice president with Dillon, Read & Co., said she expects the rules to lead to a two-tiered market, with dealers favoring the bonds of issuers that fully meet their disclosure obligations over those of issuers that do not.

Putman said that he hopes that issuers will not inundate nationally recognized information repositories or the Municipal Securities Rulemaking Board with notices of events that are not really material to their bond issues. If they do, he said, the repositories and the MSRB are going to be overburdened with a lot of fluff."

Green seemed to agree. We need to interpret the rule broadly and with common sense and not nitpick the little details."

The rules call for broker-dealers to have procedures and systems in place to monitor material events that could affect the bonds they recommend to investors.

Green, Putman, and Becker all said they are concerned about whether the information repositories will be operating in an efficient and cost-effective manner by the time the rules take effect.

Becker urged the information vendors and other would-be repositories to find out how analysts need to receive disclosures. This will avoid expensive mistakes" that would have to be paid for by the dealers, she said.

Becker said she was disappointed that the SEC rules did not require electronic disclosures because scanning printed material is time-consuming and expensive. Someone in the audience said most retail investors do not generally have access to electronic information yet, though that may change with increasing computer sales.

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