SIFMA Brief Disputes SEC Claim in Jefferson Co. Swaps Case

The Securities Industry and Financial Markets Association is challenging a key claim of the Securities and Exchange Commission's suit against three Alabama individuals by arguing that the SEC does not have oversight of interest rate swaps based on its municipal swap index, claiming it is an index of interest rates, not securities.

In a 166-page friend-of-the-court filing late Thursday, SIFMA said that the commission's case against Birmingham Mayor Larry Langford, broker-deal William Blount, and lobbyist Al LaPierre in connection with Jefferson County, Ala.'s lucrative municipal bond and swap deals represents an "inappropriate expansion" of its antifraud regulations to non-securities-based swaps. The industry group made the filing with the U.S. District Court for the Northern District of Alabama, which is deciding whether to dismiss the suit filed in late April by the SEC.

The brief, which does not take sides for or against any party in the suit, nevertheless comes as the SEC has gone to great lengths to argue that the Jefferson County swaps in question were in fact securities-based by citing, among other things, information on SIFMA's Web site.

In disputing the commission's claims, SIFMA pointed to the Commodity Futures Modernization Act of 2000, which says that "swap agreements" are not securities and prohibits the SEC from imposing procedures or standards as preventative measures against fraud, manipulation, or insider trading with respect to swap agreements, among other things. It also disputed an SEC argument that even if some of the swaps are not securities-based, they were still entered into "simultaneously with" municipal bonds and are therefore subject to its anti-fraud provisions.

SIFMA said the commission's interpretation is "implausible" in light of the plain language of the statute.

"Such an amorphous and expansive theory would effectively eviscerate the careful and deliberate distinction that Congress drew between security-based swap agreements and non-security based swap agreements when it clarified that only the former are subject to the SEC's anti-fraud enforcement authority," the group said.

The commission filed a 40-page, six-count complaint against the trio on April 30, charging Langford selected Blount's firm, Blount Parrish & Co., to participate in every Jefferson County muni bond offering and security-based swap agreement transaction during 2003 and 2004 in return for undisclosed payments made to Langford via LaPierre, a long-time friend of both men.

Langford, the former head of the Jefferson County Commission, helped select participants for county transactions, while Blount served as lead underwriter, co-underwriter, and remarketing agent for many Jefferson County bond offerings and served as a consultant in its swap agreements.

SEC officials would not comment on the SIFMA brief. SIFMA does not dispute the SEC's charges of fraud in connection with the county's municipal bonds.