WASHINGTON -- The Securities and Exchange Commission may propose a double-barreled standard designed to force substantial improvements in secondary market disclosure about municipal securities, SEC Commissioner Richard Roberts told state finance officials yesterday.
First, the agency is eyeing a rule that would prohibit dealers from recommending, or possibly even selling, bonds to investors in the secondary market if dealers do not have current information about the financial status of the issuer, Roberts said.
Second, he said, the SEC may issue a legal interpretation of its current rules reminding issuers that they, like broker-dealers, are covered by federal antifraud statutes and that a failure to disclose material information about their bonds could land them in legal hot water.
The interpretation also might include a provision spelling out that the antifraud statutes require issuers to disclose at the time they sell their bonds whether or not they intend to provide secondary market information, the commissioner said.
Roberts made his remarks during a panel discussion on secondary market disclosure held at the annual meeting of the National Association of State Auditors. Comptrollers & Treasurers in Baltimore.
He said the recommendations are included among a "number of alternatives" that the commission is eying as it and other regulators prepare reports for the House Energy and Commerce Committee. The reports will state what, if any, changes are needed in the federal securities laws to better protect municipal bond investors.
The SEC, the Municipal Securities Rulemaking Board, and the National Association of Securities Dealers are expected to send their recommendations to the committee about Sept. 3.
The proposals come in the wake of recent influence-peddling scandals in New Jersey, Louisiana, and Massachusetts. Just two weeks ago, under pressure from the SEC and Congress, the MSRB proposed two rules to control political contributions by dealers and improve secondary market disclosure.
Roberts stressed that the ideas being discussed by SEC staff members and commissioners are tentative and could change.
Although he thinks the SEC already has authority to issue the two rule changes he discussed, Roberts said the agency is talking about seeking "backup" legislation from Congress. The SEC may ask Congress to amend the Securities Exchange Act of 1934 to provide the agency with a "specific grant of authority" over municipal securities issues, since that authority is written vaguely in current law, he said.
Roberts said winning the congressional support needed to enact the legislation would be a "formidable challenge." Nevertheless, Roberts said, "I am strongly considering advocating this approach," at least as a backup in the event the SEC finds it cannot push for issuer disclosure through its own rules.
The legal interpretation being eyed by Roberts would build on a standard the MSRB is expected to propose later this year, which focuses on dealers rather than on issuers. The board announced on Aug. 5 that it would propose a rule that would require dealers to alert investors in writing at the time of a bond sale whether an issuer intends to provide secondary market disclosure affecting their investments.
The National Federation of Municipal Analysts last year called on issuers to disclose in bond documents, one way or another, whether they plan to provide secondary market disclosure for their offerings. Bond lawyers have already succeeded in getting a smattering of issuers to put such notices, including statements that they will not provide disclosure, in bond documents.
"It appears to me that municipal issuers should be subject to mandatory, minimum secondary market disclosure standards, except possibly in the case of issues less than $1 million and state general obligation [bonds]," Roberts said.
"Although as a native of the Deep South I am sensitive to states' rights concerns, the states' rights arguments against the imposition of such standards goes out the window in my view when securities are offered to out-of-state investors," he said.
Roberts said another regulatory alternative would be to recommend varying secondary market disclosure for different types of municipal bonds.
"Some studies have shown that significantly more information is available for general purpose units of government than for special purpose units, institutions without general purpose government oversight, and conduit issuers," he said.
"In addition, some studies have shown that many bond defaults come from unrated issues and, more specifically, that most of these defaulted issues are related to private-activity or special district financings."
Roberts said the disadvantage of that approach, however, is that it "could very quickly become awkward and could easily bog down in a series of legislative definitional struggles."
He said another alternative would be to wait until the MSRB issues its secondary market disclosure rule and then to monitor its results.
But, he said, he would prefer not to wait. "I am leaning in the direction" of a regulatory or legislative approach to the secondary market disclosure problem, Roberts said. "I believe that the municipal securities marketplace could voluntarily impose its own discipline ... but to date it has not."