WASHINGTON - The Public Securities Association will strongly oppose the Securities and Exchange Commission's proposed rule on riskless principal transactions, the PSA said in a letter sent to regional dealers.

The municipal dealers trade group also said it is urging regional dealers to sent their own letters to the SEC expressing concern over the plan.

"I am writing to alert you to SEC regulatory proposals that are currently out for comment," said Silas L. Matthies, chairman of PSA's regional advisory committee. "I believe these changes, if adopted by the SEC would have unintended and undesirable effects on the markets in which we conduct our business and on the companies we own and work for."

Matthies said the PSA is working on a "vigorous response" that it will send to the SEC by June 15, when comments are due on the rule proposed on March 9. He added, however that the proposed changes are so significant that the SEC should hear directly from as many individual firms as possible.

The rule would require dealers to disclose on bond confirmations their markup up on riskless principal transactions. The SEC's proposed rules defines a riskless principal transaction as one in which a dealer receives and order from an investor, locates a seller, buys the bonds for its own account and then quickly sells them to the investor.

Matthies said that it is clear from the various forums held by the PSA to date "most firms in the industry share my concerns that these changes would have a detrimental effect on issuers."

He outlined eight potential arguments that the PSA may use in its comment letter to the commission.

"An immediate consequence of requiring mark-up disclosure of riskless principal trades will be to encourage dealers to execute more trades out of securities held in inventory," Matthies said.

"Dealers will therefore be required to carry more inventory, which entails greater risk and higher costs. These costs would ultimately be passed along to customers," he said.

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