WASHINGTON -- SEC staff officials have given commissioners their recommendations on final secondary market disclosure requirements for the municipal market but are still wrestling with which bond issues should be exempted, sources say.

At the same time, the Securities and Exchange Commission staff has asked chairman Arthur Levitt to suggest both a date for the commission to consider the disclosure requirements and whether a pending proposal on riskless principal transactions should be deferred, said one well-placed source.

While Levitt can make these suggestions, they would take effect only if other SEC commissioners agreed to them, commission sources said.

The Public Securities Association has vigorously opposed the riskless principal transaction proposal and has urged the SEC to abandon it, arguing it will create disparities among firms in the marketplace.

A riskless principal transaction is one in which a dealer buys and sells bonds almost simultaneously without holding them in inventory so that there is little risk of loss from sudden market changes.

The PSA is developing a program to provide retail investors with generic information about bond prices in hopes that the SEC will view it as an alternative to its proposal on riskless principal transactions.

SEC staff officials are not revealing their recommendations to the commissioners on final secondary market disclosure requirements, but a commission source confirmed yesterday that "there is still some wrestling with the exemptions."

The SEC proposed amendments to its Rule 15c2-12 on municipal disclosure last March that would bar dealers from purchasing or selling bonds unless the issuer had pledged in writing to provide financial information and notices of material events to a nationally recognized repository.

Dealers would also be barred from recommending bonds to investors in the secondary market unless they had reviewed the issuer's financial information. But most market participants have urged the SEC to drop this proposal, arguing it could bring the market to a halt.

The SEC had proposed that the disclosure requirements not apply to new bond issues of less than $1 million that were offered by issuers that had less than $10 million of outstanding bonds and that had issued less than $3 million of bonds in the 48 months preceding the offering.

A group of 10 municipal market groups proposed in August that the SEC broaden its proposed exemption to apply to bond issues of less than $10 million for issuers or obligors with less than $25 million in outstanding long-term debt.

But to qualify for the exemption, issuers and obligors would have to agree to make information publicly available upon request under the Freedom of Information Act or other such laws. They would also have to disclose material events.

SEC staff officials indicated they were struggling with the exemption provisions at a meeting last Wednesday with representatives of the 10 municipal market groups, market sources said.

"They're trying to determine what's going to be fair. It's a delicate question where you draw the line," said one source who did not want to be identified.

The staff wants exemption provisions that are not overly burdensome for small issuers but that also do not undermine disclosure requirements, the sources said. One concern is that the vast majority of municipal issuers and bond issues are small.

Meanwhile, SEC commissioner Richard Roberts yesterday said the commission staff has serious concerns about a Municipal Securities Rulemaking Board proposal to exempt retail salespersons from its pay-to-play rule.

"The staff had some problems with it when that proposal first came in, and I don't think their view has changed," Roberts said.

They are concerned the proposal "substantially undercuts the spirit of the rule," he said, stressing however that no decision has been made yet on the fate of the proposal.

The MSRB rule, which took effect in April, generally bars municipal dealers that make contributions to issuer clients from doing business with those clients for two years afterwards. It applies to "municipal finance professionals" or anyone "primarily engaged" in municipal securities activities. The board proposed exempting retail sales representatives from the rule in August after the PSA complained it would be difficult for firms to determine whether their retail sales representatives were subject to the rule.

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