WASHINGTON -- An ounce of prevention, it is often said, is worth a pound of cure.
That truism is particularly relevant in light of two proposals that have the potential to help spur significant improvements in the municipal bond market.
The first is the announcement by the Securities and Exchange Commission that it will hold an open meeting this Thursday to vote on the Municipal Securities Rulemaking Board's plan to create an electronic library to gather official statements and continuing disclosure information.
That plan consists of two important elements. One would allow the MSRB to create an electronic system that would collect official statements and advance refunding documents on paper and repackage them electronically for dissemination to the market. The other would establish a voluntary secondary market disclosure system in which bond trustees, issuers, and others would send market-sensitive information electronically to the library, which would then verify it and make it available to the market through information vendors.
The MSRB plan, while not perfect, offers the best current hope of making voluntary disclosure work and avoiding costly corporate-style registration of municipal bonds.
The five-member SEC, which is expected to vote separately on both the overall library plan and the secondary market disclosure proposal, should approve both proposals in tandem without delay so that the MSRB can get its system up and running as soon as possible.
The other significant development is the recent decision by state financial officials to set up a loosely knit network designed to strengthen states' oversight of state and local debt issuance.
Not only would states benefit from sharing information about other states' oversight, but the exchange also should lead to the creation of more state bond oversight commissions. At present these exist in only a few states.
Such groups offer states a perfect opportunity to prevent abusive deals from going to market and to make sure that issuers do not get into trouble by overissuing.
It is doubtful whether the billions of dollars of abusive escrow and black-box deals that are still haunting the market would have ever made it to market in the mid-1980s if most states had had oversight commissions to blow the whistle on them. The recent massive defaults by special districts in Colorado also might not have occurred if a state oversight group had warned that too many bonds were being issued.
Both the MSRB electronic library and the treasurers' attempts to improve oversight should be actively supported by all participants in the market.
The reason is simple enough. If current voluntary efforts to improve disclosure and oversight fail, the federal government surely will take over the task.