WASHINGTON -- Wall Street yesterday gave good marks to a recent proposal by Securities and Exchange Commission member Richard Roberts that his agency restrict tax-exempt money market funds from investing in short-term paper of issuers that do not pledge to make secondary-market disclosure.
But issuers tentatively gave Mr. Robert's suggestion a thumbs down, saying it gives the SEC a foot in the door to impose further regulations affecting issuers.
The SEC's investment management staff is expected soon to propose new quality and diversification requirements for bonds bought by tax-exempt money market funds in a set of amendments to its money market rule 2a-7.
Speaking at a luncheon sponsored by the Investment Company Institute on Nov. 12, Mr. Roberts said he urged the SEC staff to adda provision barring money market portfolio managers from buying variable-rate demand notes from issuers who do not pledge ongoing disclosure. He said the need for current information was highlighted by problems experienced by tax-exempt money market funds holding variable-rate demand notes insured by Mutual Benefit Life Insurance.
He added that current information is critical for remarketing agents to have a reasonable basis for recommending short-term municipal paper to their customers and for board of directors of taxempt funds that must monitor credit qualify of their portfolios.
"I think it's an excellent idea," said Frank Murphy, manager of short-term products at Lehman Brothers, the largest remarketing agent for variable-rate securities in the country. "While there may be some additional ogistical demands in the providing of the updated information, from a longer-term perspective it can only help the investors."
He predicted that the market is profitable enough for issuers that they will not be discouraged by any additional standards.
"It's a very good idea," said one short-term trading manager, who asked not to be identified. "It will shake out people who are suspect, who are unwilling to provide it."
Another trading manager said, "There ought to be adequate disclosure on everything. It's the wave of the '90s. It only comes back to haunt dealers" when it is not provided, he said. "The dealers have had to do a lot of extra work" in response to new SEC rules on disclosure, he said. "It's about time that if we are going to have to have all those responsibilities, that issuers should have them also.
"On the surface it sounds like a decent way to police this stuff," said Stanley Ciemniecki, executive vice president and manager of national underwriting for Lehman Brothers.
But Catherine Spain, chief lobbyist for the Government Finance Officers Association, said the plan advocated by Mr. Roberts would be unnecessary. "Our thinking is that any issuer out there doing these variable-rate demand notes is probably a pretty frequent issuer and providing information to the market fairly regularly already."
She said the plan also would be a "foot in the door" for the SEC to impose further regulation later.
A Wall Street short-term trading manager said the SEC should move cautiously. Most firms already to the necessary credit analysis internally to avoid buying poor deals for their portfolios. He also said a rule like the one proposed could dry up supply of short-term debt.
"My gut feeling is that anything that restricts money market funds from purchasing short-term product is potentially detrimental," he said.
Meanwhile, Daniel Maclean, vice president and general counsel of Dreyfus Corp. and chairman of the an Investment Company Institute task force that recommended new rules for tax-exempt money market funds earlier this year, said Mr. Roberts's proposal is "apt to work" and suggested a phased in approach.
"You could stagger the process," he said. The first year the SEC could set no restrictions, he said. The second year it could require that only 80% could be invested in paper that does not provide ongoing disclosure, and so on, he said.
Two prominent bond analysts also commented on the Mr. Roberts's plan.
Kendrick Anderson, senior fixed income analyst for Fidelity Investments in Dallas, said he supports Mr. Roberts's proposal, particularly since it would enoucrage issuers to supply seconday-market disclosure without dictating what the content of that disclosure should be. But he said the agency still has some unfinished business since it exempted much short-term municipal debt from its primary market disclosure rule 15c2-12, which it issued in 1989.
"It makes sense that you can't do one without the other," said Mr. Anderson, who supports amending the rule to include short-term debt. He said a secondary market rule for variable-rate demand notes would not dry up the market for that debt. "The size of deals are large and the amount of information that needs to be disclosed is small," he said. "An annual information update would be sufficient in most cases."
Mary Jo Ochson, vice president of Federated Research in Pittsburgh and president of the National Federation of Municipal Analysts said that she is a strong advocate of primary and secondary-market disclosure but that she is not certain that the Investment Company Act is the "appropriate focus" for the topic.
She said it is the individual retail investor buying random bonds in the seconday market who needs disclosure information most, and Rule 2a7 would not help that person. Moreover, Rule 2a7 already requires fund analysts to search for high-quality securities with minimal credit risk. "Once can never regulate against erroneous analysis," she said. "That task is up to the adviser."
Ms. Ochson added that a money market rule would raise some thorny questions, such as whether disclosure would be required with respect to the credit enhancement on each municipality in the pool.