WASHINGTON -- A shudder went through the municipal market last week, but it shouldn't have.
The quiver came over the market after a Public Securities Association official warned a dealer seminar that a provision in the Securities and Exchange Commission's proposed disclosure rule could bring trading in some bonds to a halt of issuers failed to provide promised information.
The amendments proposed by the SEC would bar dealers from underwriting bonds unless an issuer pledges in writing to provide ongoing disclosure to a nationally recognized repository.
But the measure also contains a provision requiring dealers to "review" information issuers have pledged to provide before advising their secondary market customers to buy or sell bonds. The provision is a catalyst that could set off a chain of events that would halt trading in some bond issues.
If an issuer did not provide financial information promised earlier, then the dealer couldn't review it and, therefore, couldn't recommend the issuer's bonds to a customer.
The market should not have been surprised by the likely domino effect of the provision.
Since the so-called Tower amendment prohibits the SEC from regulating states and localities, the agency has made it clear for more than two years that it intends to use a "carrot and stick" approach that would force dealers to extract from issuers the information that investors need.
If dealers don't get the information, they won't be able to sell the bonds and the issuer, in effect, will be locked out of the market.
Frightened by the prospect of losing business, some dealers are looking for ways to get the SEC to water down the rule. At the seminar, one dealer suggested that the SEC require dealers to tell investors only that an issuer had failed to provide information promised rather than bar the dealer from recommending the bond.
That's a bad idea.
The SEC's disclosure proposals will go a long way toward ending some abuses that have plagued the municipal market, in particular the failure to disclose to investors the risks of some bond deals and the lack of information about changes in the financial status of some issuers.
The SEC should refuse to make any changes that weaken the goal of forcing dealers and issuers to supply vital information to investors.
And, rather than shuddering or looking for ways to get around the tough new requirements, municipal dealers should start working immediately to set up the procedures needed to comply.