Members of the National Association of Bond Lawyers yesterday repeated numerous market concerns about the tax and securities law implications of the turmoil in the auction-rate securities market, but noted that they cannot answer many of the questions unless the Securities and Exchange Commission provides some guidance.
The discussion took place during a teleconference call that NABL sponsored following the release of a notice issued last week that was written by NABL members John McNally of Hawkins Delafield & Wood LLP and Ed Oswald of Orrick, Herrington & Sutcliffe LLP that outlined the existing tax and securities legal framework in a question-and-answer format. Among other issues discussed, the notice said that issuers may be able to bid on their own securities under certain circumstances to avoid high interest costs, but it remains unclear if such moves will violate the securities laws.
The notice comes as a growing chorus of market participants and federal lawmakers, most recently Sen. Charles Schumer, D-N.Y., have written the SEC to ask that the commission allow state and local governments to buy back their auction-rate securities without running afoul of the securities laws and possibly triggering SEC enforcement action.
NABL said that over 500 people participated in the conference call, reflecting the urgency of the matter.
Martha Mahan Haines, the SEC's municipal securities chief, was originally scheduled to participate on the call, but she withdrew because she was unable to provide additional guidance, NABL said earlier this week.
Paul Maco, a partner at Vinson & Elkins LLP and Haines' predecessor at the commission, participated in her place during the call. He noted that there is precedent for the commission to provide regulatory relief to the market, though the occasion he cited involved a 1982 rulemaking change to create a "safe harbor" from liability of market manipulation under certain circumstances in the equity securities market.
In addition to the discussion of securities, panel members addressed the latest Treasury Notice 2008-27, which defines the rules for reissuance in terms of interest-rate mode conversions. John J. Cross 3d, an attorney with the Treasury's office of tax policy, and Oswald discussed the notice's implications.
Much of yesterday's conversation mirrored the issues Cross and NABL members talked about last month at NABL's Tax and Securities Law Institute in San Francisco. Cross emphasized that as long as a potential conversion is mentioned in the bond's documents, it will not trigger a reissuance, which would require issuers to repeat a complicated series of tests on the bonds. He added that auction-rate bonds are considered qualified tender bonds, which are covered by the notice.
But Cross said it is "admittedly ambiguous" as to whether bond documents must disclose the possibility of such conversions for the entire issue, or for just certain bonds.
"I think, arguably, we would be more comfortable with all the bonds of the issue having these characteristics," Cross said. He added that Treasury officials will consider suggestions and comments from the public before turning the notice into proposed Internal Revenue Service regulations.
