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SEC Plans ARS Guidance by Friday

WASHINGTON - The Securities and Exchange Commission hopes to issue guidance by Friday that will allow issuers to bid on their own auction-rate securities with "appropriate disclosures and in compliance with certain other conditions," Erik Sirri, the SEC's director of markets and trading, told members of the House Financial Services Committee yesterday.

"This guidance would be designed to clarify that ... municipal issuers can provide liquidity to investors that want to sell their auction-rate securities without triggering market manipulation concerns," Sirri said in testimony at a hearing on the turmoil in the municipal market. "This may also have the secondary effect of easing substantially the financial burden on municipal issuers and conduit borrowers from unusually high interest rates. It also should facilitate an orderly exit from this market by municipal issuers and conduit borrowers who seek to do so."

The forthcoming guidance will require issuers and conduit borrowers that want to bid on their bonds to disclose "certain facts related to price and quantity." It will also instruct broker-dealers that they can accept such bids without violating a 2006 enforcement settlement with the SEC over disclosure failures in the auction-rate securities market.

The guidance comes as the commission has received several requests to consider ways to assist issuers, Sirri said. Last month, the leadership of the committee asked the SEC to clarify for the markets as quickly as possible that issuers can participate in auctions for their own securities without running afoul of the securities laws, provided such bidding is allowed by the bond documents. The Securities Industry and Financial Markets Association and other market participants have sent similar letters.

Speaking to reporters at a break in the hearing, Sirri said that the SEC guidance does not come in response to any particular letter. Commission officials, he said, are responding to the auction-rate environment as they see it. He added that the guidance will likely be disseminated through the broker-dealer community.

Meanwhile, Sirri suggested that it is unlikely that the commission will alter its Rule 2a-7, which currently restricts the types of securities that can be purchased by money-market funds. To comply with the rule, money market funds are generally limited to securities that have long-term ratings of double-A or higher. In light of the downgrades to bond insurers, numerous market participants - including some who testified yesterday - support altering the rule to allow to take into account the different municipal and corporate rating scales.

"It is notable that despite the current liquidity crisis, money market funds and their sponsors have not asked the commission for any changes to the risk-limiting conditions of Rule 2A-7, including the credit rating floor," Sirri said.

However, preferred shareholders of closed-end funds have begun to contact the SEC for relief from failed auctions, Sirri said. The guidance on auction-rate securities that the commission is expected to issue later this week may not extend to the closed-end funds, he said, adding: "The division of investment management continues to assess request for guidance ... and to monitor the developments in this area closely."

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