The Securities and Exchange Commission has begun developing a standard for ongoing disclosure in the municipal securities market and wants broad market input by January on what issuers should be required to disclose, the Municipal Securities Rulemaking Board's executive director said yesterday.
And in his strongest statement to date on other top issues before the board, Christopher Taylor said the giving of political contributions to get business in the municipal market will not be tolerated and will be punished." Taylor made his remarks at a packed luncheon sponsored by the Municipal Forum of New York.
Also speaking at the forum was Heather L. Ruth, president of the Public Securities Association, who presented questions and views culled from the municipal bond industry in recent weeks about proposed MSRB rules on campaign contributions and disclosure and pricing matters.
The SEC is "beginning the process of developing a list of items for disclosure," Taylor said, nothing that MSRB staff members met with SEC staff members Friday on the issue. "They asked that we work with them and enlist the assistance of others throughout the municipal securities community, particularly issuers and investors."
Taylor did not specify what an SEC rule would say. But he noted that the SEC's recent staff report to Capitol Hill on the municipal market discusses the issue. The report says that the commission should issue an "interpretation" of the federal securities laws making clear that issuers would be engaging in fraudulent activity if they do not provide certain disclosures.
The statement is likely to draw a strong response from some issuers who contend that regulators do not have authority under the federal securities laws to dictate the content of disclosure by issuers. But while the 1975 Tower amendment bars the SEC and MSRB from dictating the content of official statements and other documents in primary market offerings, it does not bar the SEC from requiring issuer disclosure in the secondary market.
Taylor said that while the commission wants the board to take the lead in gathering the necessary parties, the "clear understanding" is that "the list in the end would have their imprimatur." They made clear that "they were not delegating the development of the list to us or any other party, and that this must be done rapidly, " he said.
"It was made crystal clear that with or without the assistance of the municipal finance community the list will be developed," Taylor said. And SEC staff members "want the list completed by the end of January 1994. That's January 1994, not 1995. That's five months from now."
He said, however, that the SEC staff believes it is "preferable" to come to some consensus with all parties on what items should be on the list.
Asked by an audience participant what he means by the term "secondary market disclosure," Taylor said, "The SEC is going to decide that for this industry in the next four months. They have already assigned staff in the SEC's corporate finance area to spearhead the effort."
The agency's corporate finance division sets disclosure standards and oversees the disclosure activities of companies registered with the SEC.
Taylor said that MSRB staff members briefed representatives of the Government Finance Officers Association and National Federation of Municipal Analysts Tuesday on the meeting with the SEC staff and are "optimistic that both organizations will, in fact, commit the time and resources to this effort."
He said there will need to be some mechanism for "tracking . . . issuer performance" under any secondary market disclosure rule. "In other words, dealers will need to be able to know whether an issuer has agreed to provide the information on the list and when and what did he last make, available. This appears to be a natural role for the board's Municipal Securities Information Library."
Taylor noted that the board is scheduled to meet next week "to considered its next moves."
But he signaled that the board is regulatory approach proposed by the board has been put on the back burner. "We played our ace. But the SEC appears to have trumped us for the time being," he said.
The board announced in August that it would propose a rule requiring dealers to inform issuers at the time a new issue comes to market about the importance of continuing disclosure. Dealers also would have had to inform customers that if the issuer has not agreed to providing continuing disclosure to a central place, then the investor's ability to receive an accurate price and find a ready market for his bonds would be impaired.
Ruth of the PSA noted that the PSA's position is that the SEC "should require issuers to provide complete and timely secondary market disclosure to a central location accessible to the entire market so that dealers can do their job."
In the area of disclosure, Ruth said that some extreme proposals could "literally freeze the secondary market."
"If a dealer cannot recommend a security, he can also not buy back a security, even one that he has previously sold under earlier rules to a good customer." she said, referring to a threat made by SEC Chairman Arthur Levitt that he would forbid dealers from recommending to any customer the security of an issuer who fails to provide secondary market information.
Taylor took issue with a charge by Ruth that the rule proposed by the board recently to curb improper political contributions will not work.
Ruth said, "Based on the reactions I'm hearing in the industry, there is not a high level of confidence that the behavior changes will happen. Certainly there is no evidence of [any] moderation in the current environment, and a great deal of evidence to the contrary."
Ruth said that the MSRB is limited in what it can do in regards to campaign contributions, noting that it has authority only over municipal bond dealers, and not independent financial advisers, bond counsel, engineers, and other entities who are involved in public finance activities. She also noted that the MSRB has been advised that as a self-regulatory agency, it is sufficiently close to being a governmental authority that it cannot proscribe political contributions from those it does regulate.
"In view of these limitations, anything the MSRB is able to do is likely to fall short of what the PSA believes could solve the problem," she said.
Ruth said the "vast majority of dealers wants desperately to see the end of political contributions to elected officials as a factor, actual or apparent, in selection of underwriters, the maintenance of business relationships, or any other influence with respect to obtaining securities business from public entities."
She noted that the PSA is working on the comments to the MSRB's proposed rules and expects next week that a draft will be shared with the PSA's Municipal Executive Committee.
The MSRB board proposed that dealers be barred from making political contributions to issuers for the purpose of obtaining or retaining municipal securities business. And other contributions made by dealers would have to be disclosed to the MSRB, which would release the information through its Municipal Securities Information Library.
Taylor said a lot of people have assumed that the rule has no clout since it would be difficult for regulators to prove that a dealer "intended" to get business by giving a contribution.
"In the strongest of terms, let me disabuse anyone of that notion," he said. The board's notice clearly states that a dealer "must be prepared to establish that any contributions were made without the intent to obtain, retain or otherwise influence the awarding of business."
"You have to be prepared to show me that you made the contribution without intent," Taylor said.
"Some have said, "Gee, I have always supported, in the name of good government, whoever is candidate for the treasurer of that jurisdiction 1,000 miles from my home, and I heard about this candidate through my investment banking buddies and, of course, we do business with that jurisdiction.'
"As my kids say. ~Bull honkey!'" Taylor said. "Maybe if the candidate happens to be your brother-in-law, roomed with you in college, saved your daughter's life, and grew up in the house next door, you could possibly justify giving him a political contribution" and subsequently doing business with him, he said.
"Give as much money as you want to someone with whom you have no current or possibly future business," he said. "But, when it comes to giving to someone with whom you have or may have business in the future, you should think very, very carefully and then check with your boss, your boss' boss, and maybe the head of the firm, because their necks are on line along with yours."
Taylor said that dealers would be required to establish internal procedures to ensure that prohibited contributions are not made.
"This means in no uncertain terms, that the head of the muni department is going to have to be able to say that Joe in the Oshkosh office made the political contribution without the intent to get business," he said. "The head of the muni department will have to show [regulators] what procedures he has in place to prevent any prohibited contributions."
Taylor said that the board takes calls on possible violations of rules, noting, "If you hear about or see someone possibly violating this rule, call me." He said the board will be referring such information to the enforcers of board rules and to the SEC's division of enforcement.
