Sparks Fly at NABL Over Issuer ARS Bids

SAN FRANCISCO - The typically calm and measured discussions of securities law erupted into a firestorm of controversy at NABL's meeting here late last week over whether issuers could bid on their own auction-rate securities without engaging in alleged market manipulation that would violate the securities laws.

The emotionally charged debate at the National Association of Bond Lawyers' Tax and Securities Law Institute came as two groups sent the Securities and Exchange Commission separate letters asking for relief.

A group of 14 hospitals in Massachusetts and California sent a letter Thursday to SEC chairman Christopher Cox and the SEC's two other commissioners, urging them to allow issuers to provide "interim, short-term self-liquidity" to support auctions and avoid the widespread auction failures that have led to double-digit interest rates.

Specifically, the four-page letter asks the SEC to issue an interpretive release, exemptive order, or other action confirming to borrowers, their affiliates, broker-dealers and auction agents that the commission's prior administrative actions on auction-rate securities "not be construed to preclude borrowers from making, and broker-dealers and auction agents from accepting, bids submitted in an auction" over the next year.

At issue for many broker-dealers, many of whom have balked at bidding to prevent failed actions, is a $13 million settlement and cease-and-desist order that the commission announced in May 2006 with 15 broker-dealer firms for engaging in industry-wide practices in the municipal, corporate, and preferred stock auction-rate markets that violated federal securities laws.

The SEC charged that for an 18-month period beginning on Jan. 1, 2003, the firms acted negligently by following a series of undisclosed practices that, among other things, favored certain investors over others, or issuers over investors, and manipulated clearing rates.

"The problem is broker-dealers don't want to accept the bids for fear that they will violate the SEC settlement and cease-and-desist order," said a bond lawyer Friday who declined to be named but approved of the letter, which was written by Anne Phillips Ogilby, a partner at Ropes & Gray LLP in Boston.

Ogilby declined to comment on the letter.

In light of the 2006 settlement, the letter stresses that issuers would take three "precautions" before bidding on their own auction rate securities.

First, they would publicly disclose their intent to bid in advance of the auction so as to promote market transparency. NABL attorneys said last week that such disclosures could come about through a material event notice filed to the four nationally recognized municipal securities information repositories, or NRMSIRs.

The issuers would also publicly disclose the dollar amount and interest rates specified in such bids by "wire release or other appropriate measure" so that the market is aware of the extent of the self-bidding and potential investors can make an informed investment decision in advance of each auction.

Finally, an issuer would be eligible to bid on its own auction rate securities only if the security's official statement or other offering document does not expressly state that the borrower will not participate in the auctions.

The letter lists several reasons why SEC guidance is in the public interest, explaining that it will "reduce the extreme market dislocation currently hurting" the auction-rate securities market.

"This in turn will help diminish pressure on the borrower's own credit ratings, which may be in jeopardy if the higher maximum interest rates continue unabated," it said. "This should help decrease the likelihood of a systemic or chain reaction problem affecting the otherwise sound underlying credits."

Separately, the Securities Industry and Financial Markets Association also filed a no-action letter request with the SEC on Thursday, according to Leslie Norwood, managing director and associate general counsel at the broker-dealer association.

Though Norwood declined to provide The Bond Buyer with a copy of the letter, she said SIFMA is aware that issuers and conduit borrowers are anxious to support their own auctions in light of the recent turmoil in the auction rate securities market. She also said the SIFMA letter is more narrowly tailored in the hopes that it would prompt a faster response from the SEC than the letter from the 14 hospitals.

"Time is of the essence in the situation," she said. "We feel, particularly in light of recent statements by SEC officials, that the larger question may not get a fast answer."

Though Norwood declined to discuss the particulars of the SIFMA letter, sources who had seen it said that it is limited to the ability of issuers or borrowers of auction rate securities buying their securities out of broker-dealer inventories.

If statements from SEC staff are any barometer, it is unclear if the commission will provide any formal guidance on whether issuers will violate securities laws if they buy their own securities at auctions. Such guidance, SEC attorney Mark Zehner said, would be "dangerous" and "inappropriate."

On Thursday, Martha Mahan Haines, the SEC's municipal securities chief, said: "I don't have answers for you on this one," after she was questioned about the matter during a disclosure panel. She added incredulously, "Are you asking whether you are able to manipulate the market price of your own securities?"

But later that day, Zehner, the SEC's Philadelphia-based regional municipal securities counsel, appeared to mollify some concerns from bond attorneys. Though he stressed that the staff can't formally or informally give advice as to how the SEC would view the applicability of the securities laws, he agreed that attorneys should use their professional judgment when advising clients that they can buy their own auction-rate securities.

"Historically, when the municipal market has had a problem, it hasn't initially decided that it's got to run to the SEC or to some regulator" he said, in a panel on enforcement. "No, generally this market has been eminently capable of solving its own problems."

Zehner's comments followed a testy exchange from some bond attorneys who felt that the SEC was being unhelpful as their issuer clients were, they said, being fleeced by "predatory" broker-dealers benefiting from a temporarily dysfunctional market.

Zehner said he could not speculate on what caused the turmoil in the auction-rate market, but he warned the attorneys to equally weigh the possibility that their issuer clients could be subject to a class-action lawsuit for bidding on their own auction rate securities in a manner that harms investors.

"I'd urge you to look at this not just as a regulatory or enforcement matter, but from your average plaintiff's lawyer or class-action lawyer's perspective," he said. "Do whatever you think is best for your client, but think about how it is going to look afterwards once the dust settles."

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