WASHINGTON - Top Securities and Exchange Commission officials said this week they may push for an agency rule that would mandate disclosure in the secondary market for municipal securities.
"Everyone appears to be of the same mind," Securities and Exchange Commission member Richard Roberts said in a telephone interview. "It may be time for the commission to step up its efforts to improve secondary market disclosure," he said, citing frustration among some agency officials over lackluster ongoing disclosure by many issuers.
Another SEC official, who asked not to be identified, also said yesterday that top officials are talking about proposing an agency rule that would require some form of continuing disclosure by issuers.
Such a proposal would be "tricky" to write, the official said, because the agency may have to use anti-fraud language in the Securities Exchange Act of 1934 as a building block. That provision prohibits market participants from making false representations and disclosures to investors.
The official said the SEC does not view the so-called Tower amendment, which limits the amount of disclosure that the SEC and the Municipal Securities Rulemaking Board can seek from the tax-exempt market, as restricting the SEC's authority to adopt such a rule.
"There's a great deal of frustration" at the agency over the lack of market participation in the Municipal Securities Rulemaking Board's six-month-old Continuing Disclosure Initiative system, Roberts said.
"As a result of that frustration and the increased attention being paid to the municipal securities market recently, sentiment exists with me and others to explore the possibility of attempting to improve secondary market disclosure in the marketplace through rulemaking action." He stessed, however, that proposal of a rule is "strictly in the discussion" stage now and that other options are under consideration.
Only a dozen banks have filed notices to date over CDI, through which bond trustees and issuers can voluntarily file time-sensitive information to the market.
The MSRB opened the system to issuers for the first time on May 17, two months earlier than planned.. But Bloomberg Financial Markets, the only private vendor to date to carry the notices, yesterday reported no filings yet by issuers.
"The MSRB's attempts have not been welcomed with open arms," Roberts said. "[They are] most likely in need of a formal response" from the SEC, he said, referring to possible rulemaking.
Katherine Bateman, head of the National Federation of Municipal Analysts, said yesterday she is reserving comment on any impending SEC rule until she has more details. Bateman, whose group has launched several major initiatives aimed at improving secondary market disclosure on a voluntary basis, said that at present the group prefers voluntary standards over mandatory rules.
Last month, the National Federation of Municipal Analysts said it is jointly exploring with issuers and the MSRB an expansion of the board's secondary market disclosure pilot to accept annual financial reports and other longer documents. One option being eyed by groups is the use of software developed through the Government Financial Officers Association, which assists in preparing annual reports.
The 1975 Tower law bars both the MSRB and the SEC from requiring issuers to file disclosure documents with the agencies before they offer their securities. It also prohibits the MSRB from requiring ongoing disclosure documents, including annual reports, to be sent, directly or indirectly, to it or to investors.
But Tower does not bar the SEC from seeking issuers' ongoing reports once their offerings go to market.
The SEC would be proposing a rule when municipals are in the regulatory spotlight on Capitol Hill and of federal agencies. The attention follows heavy publicity over federal investigations into possible illegal payoffs related to a 2.9 million New Jersey Turnpike bond issue.
"Sentiment exists at the commission to take advantage of the attention that has been focused on the municipal securities market as a result of the political contributions controversy," and to focus on other issues, particularly secondary market disclosure, Roberts said.
The leadership of the House Banking Committee Monday introduced legislation that would repeal the Tower amendment and require underwriters, bond counsel, and broker-dealers to disclose political contributions in connection with deals.
The House Energy and Commerce Committee last month launched a broad review of the adequacy of regulation in the municipal securities market, including the secondary market. It is eyeing hearings on the issue in September. Furthermore, the House Small Business Committee's subcommittee on regulation early this month launched a probe into negotiated sales of municipal bonds.
The MSRB recently signaled that it will adopt a rule soon governing political contributions. It also proposed an amendment that would toughen the board's rule requiring the sale of only suitable securities to investors. And it initiated a one-year pilot for timely dissemination of price information to the market.
