Citing the collapse of the auction-rate securities market, leaders of the House Financial Services Committee are urging the Securities and Exchange Commission to quickly clarify that there is a way for municipal issuers to bid in auctions for their own securities within the bounds of the securities laws and rules.
"Allowing issuers to participate in auctions on a transparent basis, as they have proposed, is a reasonable way to increase demand for these securities and therefore lower issuer borrowing costs," committee chairman Barney Frank, D-Mass., Spencer Bachus, R-Ala., the ranking minority member, and Paul Kanjorski, D-Pa., the head of the capital markets subcommittee, told SEC chairman Christopher Cox in a two-page letter dated Feb. 28. "Any concerns the commission may have over future unintended consequences can be addressed by constructing the guidance as temporary to deal only with the present liquidity crisis."
The lawmakers said they are writing out of concern over the "severe and ongoing disruption in the municipal bond market that is driving up borrowing costs for hospitals and universities as well as taxpayers and ratepayers by millions of dollars."
"We ask that the commission consider the inordinate impact on issuers ... and their limited options in the current market environment when you contemplate the request before you," the letter said.
The letter comes as auctions of such securities have failed all over the nation, causing issuers' borrowing costs to skyrocket. The collapse of the market stems from the fact that most auction-rate securities are insured and most of the insurers have been exposed to the subprime mortgage market and have experienced actual or threatened rating downgrades as a result. Issuers have besieged their lawyers and advisers to help them fix the problem, either by converting their securities to other interest-rate mode structures, changing credit enhancement, or allowing the issuers to bid on their bonds at a pre-disclosed interest rate. The Treasury Department recently issued tax-law guidance designed to help issuers convert their bonds without triggering reissuance restrictions.
But the specter of issuers bidding on their own bonds has led market participants and regulators to become concerned that issuers would be engaging in market manipulation. The issue dominated the National Association of Bond Lawyers' Tax and Securities Law Institute in San Francisco Feb. 20-22, with bond lawyers pleading with SEC officials for guidance.
The lawyers were frustrated when they were told by SEC officials that the commission typically does not opine on whether particular situations would result in securities fraud violations, because every situation is specific to a certain set of facts and circumstances. The officials also warned that even if they were to give guidance, it would not protect issuers from bondholders who could sue them for market manipulation.
Broker-dealers historically prevented such auctions from failing, stepping in to bid on the securities. But they later paid millions of dollars in a settlement with the SEC, which was concerned the practice was never disclosed as a possibility to bondholders.
The lawmakers' letter also comes as NABL issued an eight-page notice late Thursday, written in a question-and-answer format, that detailed securities and tax law concerns in the auction-rate securities market. The letter - which was not issued as legal guidance - said that there may be a way for issuers to bid on their bonds, but there was no guarantee there would not be resulting problems with regulators or bondholders.