ATLANTA -- The Securities and Exchange Commission's new disclosure requirements would only cover trades that are initiated by brokers. but firms should be "very cautious" about what they view as an unsolicited trade, an SEC official warned dealers.

"Would the secondary market disclosure [rule] apply to unsolicited transactions? The answer is no. [It] only applies to direct recommendations," Belinda Blaine, deputy chief counsel of market regulation, told market participants at a Public Securities Association seminar held here last week on disclosure, political contributions, and other burning regulatory issues that effect municipal bonds.

"However, the SEC views the word ~recommendation' very broadly. So something that you may think is unsolicited, we may believe is a solicited transaction," Blaine said.

The SEC's proposed amendments to its disclosure rule 15c2-12 would bar dealer from underwriting bonds unless the issuer has pledged in writing to provide ongoing disclosure to a nationally recognized repository.

Dealers would have to review the issuer's information before they recommend to their secondary market customers that they buy or sell bonds, according to the rule, which was proposed March 9. Comments on the proposal are due July 15.

Robert Colby, deputy director for market regulation at the SEC, said Monday that if an issuer fails to provide an annual audited financial statement by the date it has pledged in bond documents, for instance, then dealers cannot recommend the bonds to customers.

A dealer could still sell bonds to a customer if the customer independently asked for them and the dealer did not pitch them, Colby said. But an SEC source, who asked not to be identified, said dealers should be careful. "What if the broker shows sales literature to a customer. Then the customer goes away, comes back, and says, ~I want to buy these securities.'" That sounds like a solicited trade, the source said.

Blaine said in a telephone interview yesterday that she could not elaborate on her remarks in Atlanta. "We're looking into the issue. People are talking to us about what they believe is solicited and unsolicited. We're giving that some thought," she said.

Also appearing on the PSA's panel Thursday were two Boston dealers who warned that the SEC's new disclosure rule would have a major impact on regional bond firms.

"We've made our bread and butter on having a local expertise on some of the issues," said Elizabeth W. Whitehead, senior vice president of public sector management at BayBank Boston. "We trade in names that we know and haven't had to rely on databases.

"The rule is going to change the costs and margins on our regional business. Our local expertise will be diminished because there will be national access to credit information.

"That doesn't mean that the Wall Street firms are going to bother to bid on odd lots. Someone is going to do the research. So the bid-ask spread has to widen or our margins are going to narrow substantially."

George D. Jaeger, vice president of underwriting for Shawmut Bank in Boston, said, "It's going to become an administrative nightmare. I think it's really going to impact on the liquidity side. [It might be] cost-effective to go through this process for a million [dollar] bond piece, but when you get down to fives, 10s, and 20s," it is a different story, he said.

"The trader on the desk is not going to want to go through this process. I'm not saying it's right or wrong. But realistically speaking, the bids that will be received will be fewer, probably more from a regional perspective," Jaeger said.

Panelists asked Blaine what steps dealers must take to comply with the rule. "If you have something standing on your computer that was updated from time to time by the research department," would that be sufficient, one panel member asked.

"Yes," Blaine said. "I would say that we have built sufficient flexibility into the rule to allow you to meet your obligations in any way you see fit. If you are a large broker-dealer, you can use your research department much in the same way that you use it to comply with other [federal] rules."

Christopher Taylor, executive director of the Municipal Securities Rulemaking Board, implored dealers at the conference to file comments on the proposed amendments to Rule 15c2-12, as well as pending proposals on political contributions, price dissemination, clearance and settlement, and broker-dealer education.

"I cannot urge any of you enough on all these issues," Taylor said. "Get involved. Get your views known. We are talking about a substantial change in this industry across the board in [a number of] areas.

"They all involve compliance procedures. If you don't have the procedures in place, it's going to be a real problem. It is not going to do anyone any good that on the day the rules become effective, you walk onto the trading floor or into the public finance department and say to these people, ~Now this is what you are going to do.'

"You are going to have a revolution on your hands because these changes are in some ways revolutionary."

Taylor noted that the SEC asked a series of questions in the proposed rule about the electronic system dealers must use to obtain timely disclosure. "When a block of bonds comes in, you're going to have to be able to push a button, put in the CUSIP number, and know what information is supposed to come in from the issuer, when it will come in, and know about that information before you can made a bid. You cannot make a secondary market trade unless you are aware of this information," he said.

"Now you have to ask yourself, what do you want? How do you want to press the button? What do you want to see come up on the screen? How do you want access to this? That side of the equation has not been looked at thoroughly," Taylor said.

Also at issue is whether issuers should be required to send bond documents to all nationally recognized repositories or just one. Both methods have problems, Taylor said. He also said that if there is no industry effort to dictate the form and content of disclosure, there is the potential for an "avalanche of information" to hit repositories.

Another issue, Taylor said, is what procedures dealers should use to verify that they have reviewed an issuer's disclosure. "I'd be worried about a customer coming back and saying, ~You sold me these bonds. The value dropped and the bonds got called. I don't think you reviewed all the information.' What are you going to tell the customer?" he said.

"If I had an information system, I'd make damn sure that system tracked at the end of the day how many inquiries I made to find out what was going on with those bonds. So I can show that I queried the system on this thing," Taylor said.

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