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MSRB Proposes System For ARS Information

WASHINGTON - The Municipal Securities Rulemaking Board yesterday proposed establishing a centralized system for the collection and dissemination of critical market information about auction-rate securities that would increase the amount of information available to market participants.

"The MSRB remains concerned about the lack of information available to market participants regarding municipal auction-rate securities and other short-term instruments," the board said in an eight-page notice describing the proposal. "Currently, there is no source of comprehensive same-day information about auction-rate securities available to non-market professionals, even information as basic as the clearing rates set through the auction process."

The MSRB notice came just after the Securities and Exchange Commission released long-awaited ARS guidance Friday night that outlines the steps that issuers and conduit borrowers should take, and the disclosures they should make, in order to bid on their own auction-rate securities without triggering SEC enforcement action for securities law violations.

Market participants said yesterday that they are pleased with both announcements, but remain skeptical that they will be enough to restore confidence in the faltering auction-rate market.

The MSRB's notice asked market participants to submit comments on its proposed auction-rate information repository by April 21. MSRB executive director Lynnette Hotchkiss said the timing of the system's launch will depend on comments from market participants and its conversations with the SEC, which must approve the system.

Specifically, the board is proposing that dealers operating auction-rate programs report auction information to a central system that would be operated by the MSRB. Auction results would have to be reported no later than 5 p.m. Eastern Standard Time on the day the auction occurs. If the program dealer has not received the results by then, it would have to report the results as soon as possible after they receive them from an auction agent. The MSRB would immediately display the information received from program dealers on a Web site.

Under the proposed program, dealers would have to submit: Cusip numbers; the name of the program dealer or dealers; the number of days of the reset period; the minimum denomination; the date and time of the auction; the interest rate for the next reset period; and an indication of whether the clearing rate is a "maximum rate," an "all hold rate," or "set by auction," as well as the collar amount of the securities auctioned.

The MSRB also is asking for comments on whether additional information should be submitted by dealers, including: the number of bidders; the par amount of securities for sale in the auction; the number and aggregate dollar amount of bids made; the number of bidders other than the program dealers, issuer, or conduit borrower; the number, interest rates, and amount of bids made by both the program dealer for its own account, and the issuer or conduit borrower; the par amount of securities allocated to bids at the clearing rate; and the high, low and median bids.

The notice asks dealers to comment on several specific questions, such as whether the proposed deadline for receiving such data is sufficient, and the proposed information to be collected is appropriate.

Meanwhile, the SEC guidance was designed more as a discussion of the types of disclosures that the SEC would likely view favorably, rather than a hard-and-fast list of disclosure requirements that must be met to avoid possible SEC enforcement action. If there were any definitive points from the guidance, however, they were that the bidding must be permitted in the bond documents and disclosed in advance.

Still, the commission hedged its language.

"Appropriate disclosure in any particular case will, of course, depend on all the relevant facts and circumstances," said the SEC guidance, which was posted on the commission's Web site Friday and sent to Leslie Norwood of the Securities Industry and Financial Markets Association as well as a lawyer at Ropes & Gray LLP in Boston representing a group of hospital and health care issuers in Massachusetts and California. It was signed by Erik Sirri, the SEC's director of trading and markets, and John White, director of the commission's division of corporation finance.

The SEC letter states that "appropriate disclosure" about the submissions, acceptance, and processing of a bid "could" be disclosed in a "meaningful period (such as two business days)" before an issuer or conduit borrower's auction. Disclosure could include the intention of participating dealers to bid on the issuer or conduit borrower's behalf as well as the interest rate and amount of auction-rate securities that will be self-bid.

The letter also states that if an issuer or conduit borrower intends to bid for nearly all of the outstanding securities, that it disclose the steps it plans to take to offer to buy back any remaining securities after the auction, and whether the securities will "promptly be purchased at par plus accrued interest, if any, from any and all holders who request such a purchase following the auction."

Like the MSRB, the SEC suggests that dealers disclose "appropriately detailed information" after the auction, such as: the amount of securities for sale in the auction; the number and aggregate dollar amount of bids made; the number of bidders other than the participating dealers, issuer or conduit borrower; the number, interest rates and amount of bids, if any, made by the participating dealers; the number, interest rates, and amount of bids, if any, made by the issuer or conduit borrower; the clearing rate; and the high, low, and median bids received.

The disclosures could also include any steps to avoid an auction leading to a below market-clearing rate, such as whether the bid rates would exceed an appropriate benchmark, such as SIFMA's municipal swap index.

J. Hobson Presley Jr., of Presley Burton & Collier LLC in Birmingham, said the SEC's guidance was "what he was hoping for." At the National Association of Bond Lawyer's Tax and Securities Law Institute in San Francisco last month, he was among the lawyers arguing in favor of allowing issuers to bid on their auction-rate securities if accompanied by proper disclosure.

While he thought the SEC's actions might provide much-needed relief to the troubled auction rate market, he was less confident that it will entice new issuers, who have all but ceased to issue auction-rate securities.

"It will help in the near term for people that need to make a transition to something more stable," he said. "Whether the auction-rate market returns to stability in the long term, so that issuers are willing to use it again remains to be seen, and at this point I would say it's doubtful."

Presley said also that while the MSRB's proposal may be a step in the right direction, it may not be enough to reinvigorate issuer and investor interest in the market.

"Transparency always helps any market, so it would be a benefit to stability, but I don't think it alone will provide that stability," he said. "I think the bigger question is what, if anything, can be done to stabilize the auction-rate market for long term use."

Asked about widespread belief that the auction-rate market is dead or dying, the MSRB's Hotchkisssaid she hopes that the board's new system would help to revive it.

"There are lots of different estimates on what the size of the auction-rate market will be, and I'm not in a position to make a guess on that, but hopefully increases to transparency will allow there to be a functioning market," she said.

SIFMA praised the SEC Friday for its prompt response in clarifying that issuers may bid on their own securities without running afoul of securities laws.

"SIFMA commends the SEC for its quick response and recognition of the importance of providing participants in the auction-rate securities market with clarification on its views regarding dealers and issuers [sic] involvement in auctions," said Tim Ryan, president and CEO of SIFMA. "Specifically, we are pleased that the SEC granted a 'no action' position in the event that municipal issuers, conduit borrowers, and participating dealers participate in bids for municipal auction-rate securities, providing this activity is adequately disclosed."

Lynn Hume contributed to this story.

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