Muni Bond Dealers Just Don't Get ItKelley Holland
The $1.2 trillion municipal-bond market was battered by an embarrassing series of scandals last year. Thus, it's no surprise that the Securities & Exchange Commission is proposing reforms to make the market fairer and easier to monitor--and especially to make more information available to the millions of individual muni investors.
Unfortunately, muni dealers are unchastened. In conferences and seminars around the country, they are raising loud objections. In fact, they sound a lot like feudal lords striving to hold on to their fiefdoms as society modernizes around them.
FLYING BLIND. Many dealers, for example, are taking issue with an SEC proposal that would require them to review an issuer's disclosure documents before recommending bonds to investors in the secondary market. Muni dealers mutter darkly that this will be so time-consuming that they won't be able to recommend many bonds. And that, they claim, will cause trading in the less active issues to dry up.
Excuse me? The National Association of Securities Dealers has long required brokers selling securities, including munis, to have a reasonable basis for recommending them. Many muni dealers, though, have been using loopholes to get around this rule for unrated and thinly traded bonds. By what tortured logic can dealers defend pitching bonds they barely know?
To be sure, there is as yet no central repository for disclosures. It may make sense to delay implementation of the reform until such a facility is up and running. Still, the proposal itself is eminently reasonable. "Disclosure is so poor that I think you need this special requirement for municipals," says Richard Lehmann, president of the Bond Investors Assn. in Miami Lakes, Fla.
Dealers also object to an SEC proposal to require them to disclose markups on so-called riskless transactions--where both buyer and seller are identified before a dealer's trades take place. "What's the next step? Where are they going with this?" says R. Fenn Putman, chairman of the Public Securities Assn. "There isn't a truly riskless transaction" in volatile markets. Dealers say these trades sometimes leave them exposed to changing prices, and disclosing markups will lead investors to focus on dealers' profits rather than on the intrinsic value of what they're buying.
Again, the dealers' objections are out of line. Requiring disclosure in any business often deters abuses, and the muni market is no exception. "I don't see any reason at all" for their being upset, says SEC Commissioner Richard Y. Roberts. "I don't understand the opposition to the markup [rule]."
A few dealers, along with some money-hungry politicians, are also trying to circumvent an industry group's ban on political contributions aimed at winning underwriting business. They are trying to lure lawyers and others doing business with muni issuers to act as stand-ins and make gifts on their behalf. The industry needs to get serious in putting a real stop to "pay-to-play" giving.
With its antiquated rules and limited flow of information, the muni market badly needs reform. The SEC's proposals are a good start. Dealers will only hurt themselves if they try to hold back long-overdue progress.