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SEC Considering New Disclosure Rules For Munis

September 24, 1988

NEW YORK (AP) _ The Securities and Exchange Commission is considering a rule to improve disclosure in the municipal bond market, but opinion is divided over who the ultimate winners and losers might be.

The securities industry, and particularly underwriters at whom the changes are targeted, aren’t thrilled by the idea.

Such a rule would place the burden on them to obtain timely and accurate financial information from bond issuers and to pass it along to investors.

″In a way, it’s a joke the way it works now,″ said Richard Lehmann, president of the Bond Investors Association, which represents individual investors nationwide. ″It’s a situation where official statements come out a week after bonds are marketed.″

Some analysts say the SEC’s proposed changes are fingering the wrong people.

″The form of this type of regulation is unsymmetrical,″ said Neal Atterman, municipal research director at Kidder, Peabody & Co. ″The issuer is the one who has the information and yet because of the regulation you have to put the onus on the underwriter.″

The SEC says the rule would benefit bond buyers, particularly the thousands of individual investors who constitute the majority of municipal bondholders and whose life savings and pensions are invested in such securities.

Individual bond buyers lack the clout of the large institutional investors to gain access to financial information from a bond issuer and are more dependent on underwriters to do it for them.

Still, analysts say the proposed changes are unlikely to help bondholders in the Washington Public Power Supply System case, on which the SEC action is premised.

In 1983, WPPSS defaulted on $2.25 billion in tax-free bonds issued to finance two nuclear power projects and held by 40,000 investors. The case, the nation’s largest-ever default, is now being heard in a Tucson, Ariz., federal court.

An SEC report says bond underwriters were aware of the public utility’s problems but did not exercise ″due diligence″ to verify WPPSS’s disclosure reports as they do with other securities sales or ensure that investors were aware of the mounting construction and financial problems.

The SEC also pointed the finger at bond counsel and rating agencies for not pursuing information aggressively on their own and depending on information supplied by WPPSS.

Bond underwriters say they had no legal obligation to conduct an investigation and it was not industry practice to do so in competitive municipal bond sales.

But Bill and Linda Asmann, of Tacoma, Wash., think otherwise. The Asmanns had invested $50,000 - their entire life savings - in the WPPSS projects after their broker assured them the company was safe.

″They didn’t tell the people what was really going on, how safe the bonds were,″ Mrs. Asmann said. ″They do need regulation. They have to be required to provide more informaton. That’s the only way investors can decide.″

But will the SEC changes protect investors from future WPPSS-like calamities?

George Friedlander, an analyst with Smith Barney, Upham & Co., says the WPPSS case is rare and not a barometer of industrywide problems.

″Other than WPPSS there hasn’t been a significant default since the 1970s,″ Friedlander said. But he believes that a more structured system for having underwriters look at disclosure statements makes sense.

Others aren’t so certain WPPSS couldn’t happen again.

″There won’t necessarily be $2.5 billion defaults, but we do see others that have questionable legal basis,″ said Bob Chamberlain, a municipal bond analyst with Dean Witter Reynolds Inc.

An SEC report released Friday said more than 300 municipal bond issuers, in addition to WPPSS, currently are in default in the amount of more than $5 billion.

Analysts say smaller issues are the potential problems, not the $10 million-plus issues at which the SEC is aiming its new regulation. In addition, smaller issuers are less likely to provide full disclosure, partly because of the costs involved in doing so, they say.

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