SEC Adopts New Rules for Bond Dealers
The Securities and Exchange Commission on Thursday approved new rules that give pension funds, college endowments and other large investors new protections when dealing with Wall Street government bond dealers.
The rules were proposed by the National Assn. of Securities Dealers after local governments such as Orange County and companies such as Procter & Gamble Co. sustained huge derivatives losses.
Derivatives are high-risk securities whose value is based on an underlying asset, index, commodity, currency or interest rate.
The new rules make brokers legally responsible for evaluating institutions’ financial goals when recommending investments. Brokers would be exempt from these requirements when institutions have an outside investment advisor or have specific experience that enables them to independently evaluate a particular investment.
Failure to comply with the new rules could lead to fines and other sanctions.
The SEC approved the changes Tuesday and announced them Thursday.
SEC Chairman Arthur Levitt, in indicating to Congress earlier this year that approval was imminent, said the SEC was trying to steer a middle course.
“The notion of ‘caveat emptor’ is unacceptable, and the notion that institutions are ‘babes in the woods’ also is unacceptable,” Levitt told the House Commerce Committee in February.
The rule will cover all investments except municipal bonds, and apply to all institutions, including mutual funds, pension funds, corporations and municipalities. Municipal bonds are covered by suitability rules administered by the Municipal Securities Rulemaking Board, an industry body.
The Public Securities Assn., a bond-industry trade group that opposed the rules, said Thursday that the change is a “a step in the right direction that doesn’t go far enough.”
The Government Finance Officers Assn. praised the rules.
“I hope the effect will be to make broker-dealers more careful when making recommendations to institutional investors,” said Betsy Dotson, GFOA legislative counsel. “The rule’s real goal is to protect taxpayer funds.”
