The Municipal Securities Rulemaking Board published a notice yesterday reminding dealers of their disclosure and suitability requirements in connection with auction-rate securities and reiterated plans to issue draft changes to its rules to boost the transparency of that market.
The board's notice came as the turmoil in the auction-rate market continued for the fourth straight week, in which the maximum rates reset during auctions have ranged wildly from as low as 3% to as high as 20%, the MSRB said.
Emphasizing the importance of the auction-rate corner of the market, it also noted that muni securities with long-term maturity dates and short-term interest rate reset periods - the bulk of which are auction-rate securities - have grown from about 6% of the muni market in 2000 to about 25% last year.
The board also announced yesterday that it is considering a centralized system for the collection and dissemination of "critical market information" tied to the auction-rate market and that it is likely to be set up through the board's Electronic Municipal Market Access system, or Emma, which is being developed as the muni market equivalent to the Securities and Exchange Commission's Edgar system.
"Plans for this system will be proposed in the coming weeks," the board said in a statement.
MSRB executive director Lynnette Hotchkiss said that the board plans to ask for public comments on the proposal to boost auction transparency in the next two or three weeks, after the staff finishes the draft rule changes and the board has a chance to approve them for publication.
Specifically, the board will ask for public comments on whether it should require dealers to disclose the reset rate, the duration of the reset period, and the name of the program dealer as well as the date and time of the auction. The board also will be looking for information on the bidding information, such as the dollar amounts of the bids received, the number of bidders, and the percentage of bids allocated at the clearing rate.
"We're throwing everything in the kitchen sink out there, asking market participants what sorts of information they would find most useful and we're characterizing it into reset-rate information and bidding-rate information," Hotchkiss said. She added that the board is modeling their approach on the information provided by the Treasury Department for its auctions and on data Wisconsin currently discloses online for its transactions.
Auction-rate securities are floating-rate instruments whose interest or dividend rate is periodically reset by an auction. During the auction, investors indicate whether they want to hold, purchase, or sell the securities at specified rates to broker-dealers, who then submit the bids to an auction agent. The auction agent determines the clearing rate, which is the lowest rate that will result in the sale of all the securities being auctioned.
If there are not enough bids to cover the securities for sale, then the auction fails and the issuer must pay an above-market rate set by a predetermined formula. If all of the holders of the securities choose to hold their positions without bidding a particular rate, then the clearing rate is the all-hold rate, a below-market rate set on a predetermined basis.
Yesterday's notice warned that the MSRB is aware that auction-rate securities are often sold to retail investors who may not have the same sophistication as institutional customers in understanding the features of these complex securities.
"It is therefore particularly important for dealers to focus attention on the application of MSRB investor protection rules when effecting transactions in auction-rate securities," the notice said, citing the board's Rule G-17 on fair practices and its Rule G-19 on suitability.
