The Securities and Exchange Commission has not decided whether secondary market disclosure standards should be retroactive, but a top SEC lawyer said yesterday she believes retroactivity would be harmful to the municipal market.
"If it was done for existing issues, it would freeze everyone in place and harm people. That would make no sense," said Catherine McGuire, chief counsel for the SEC's division of market regulation.
McGuire, who spoke at a workshop on disclosure at the Association of Local Housing Finance Agencies' fall conference, said she favors a disclosure requirement that only applies to new issues.
Her remarks come just a month after SEC Chairman Arthur Levitt Jr. told market participants they have until January to agree on a plan for improving ongoing disclosure.
"For the new bonds, it puts the pressure right with the person who's going to be making the pricing decisions," McGuire said.
It would force an issuer to ask, "Do you want to pay a premium or be paid less for your bonds because you're unwilling to make these commitments about future disclosure?" she said.
Because bonds trade most actively right after they are issued, "It doesn't seem like it would necessarily be all bad to just have a going-forward requirement," McGuire said. But, she added, "That definitely is not decided yet."
If the SEC does decide that secondary market disclosure should be retroactive, "we'll have to answer the question of how people do it," she said.
McGuire also cautioned issuers that they should not assume that a credit-enhanced issue will not need to encounter further scrutiny about its viability under secondary market disclosure rules.
"I'm unwilling to look at the pool of assets and only look to the credit enhancer," McGuire said. "It seems to me that I am interested in whether or not a particular bond is going to pay off. That does matter. That is the first line of defense."
Even if the issue is priced off the credit enhancement, McGuire said she would still "want to look at the first line" of defense. "For me, if everyone is looking at the second line, I want to know what's happening out in front."
McGuire said the SEC staff is meeting with issuers of housing bonds and other types of bonds that depend heavily on credit enhancement to better understand that market. But historically, "nobody just looks at the credit enhancer. The question is, is the issue likely to default, and then, if the issue does default, will the credit enhancer be there," McGuire said.
SEC staff members "still feel that the first threshold payer is the issuer," she noted.
Levitt told roughly 40 market participants meeting in New York on Oct. 14 that they have until January to reach a consensus on a plan for improving ongoing disclosure. SEC officials then met with roughly 25 representatives of the municipal industry behind closed doors on Oct. 20 to begin developing a secondary market disclosure standard.
The Oct. 20 meeting was sponsored by the SEC's corporation finance division, which is headed by Linda Quinn. McGuire's division, which in 1989 developed the agency's first municipal disclosure standard, Rule 15c2-12, is providing assistance to Quinn's division.
