BRADENTON, Fla. - The Securities and Exchange Commission is examining the investment practices of the Florida State Board of Administration, according to a letter the SBA received this winter.

The SEC, in a Feb. 25 letter describing its investigation, asked the SBA to turn over a host of documents concerning investment guidelines and restrictions, brokers, securities purchases, and fund qualifications for the Local Government Investment Pool, the Florida Retirement System Pension Plan, and portfolios that the SBA manages for Citizens Property Insurance Corp.

In the four-page letter, signed by senior counsel Salvatore Massa of the SEC's Miami office, the SEC also asked for documents relating to the purchase of more than 10 specific securities, as well as information about how the state agency decided to make purchases of asset-backed commercial paper and certificates of deposit.

The SEC also requested documents about the ability of some SBA funds to acquire securities issued under Rule 144A of the Securities Act of 1933, which provides a methodology for selling certain securities without registration.

SEC spokesman John Heine, contacted Friday, would not comment on the letter or confirm or deny that there is an investigation.

The SBA is an agency of the state government that provides a variety of investment services to state and local governmental entities. They include managing the assets of the Florida Retirement System and Investment Plan, the Local Government Surplus Funds Trust Fund also known as the LGIP, the Hurricane Catastrophe Fund, the Lottery Fund, and a large portion of Citizens Property Insurance Corp.'s assets.

The SEC's inquiry is described as a public records request on the SBA's Web site. SBA spokesman Mike McCauley could not be reached on Friday for comment on the SEC investigation or whether the letter has been disclosed to the SBA's Board of Trustees and other investment advisory panels.

In an interview earlier last week, McCauley said the SEC request was very detailed and centered on the local government investment pool. He also said most of the information requested by the SEC had already been disclosed and reported on the agency's Web site.

The SEC is seeking audits, daily compliance monitoring logs, and even "curriculum vitae for all SBA traders, portfolio managers, and analysts who traded, analyzed, or otherwise participated in the decision to invest in and hold" certain securities.

The securities the SEC is interested in include instruments from Countrywide Financial Corp., Axon Financial Funding, KKR Atlantic Funding Trust, KKR Pacific Funding Trust, Ottimo Funding, Thornburg Mortgage, Luminent Mortgage, American Home Mortgage, and RAMS Home Loans, the letter specified.

Those are among the downgraded securities purchased for various SBA portfolios, including the LGIP.

The breadth of problems arising from those troubled investments came to light late last year. Cities, counties, and other governmental entities began withdrawing huge amounts from the $27 billion LGIP pool after some investments experienced rapid rating downgrades sparking fear that they were linked to subprime mortgages.

To preserve the dwindling pool in December, the SBA divided it into Fund A and Fund B. Distressed and defaulted securities were placed into Fund B, which enabled Fund A to qualify for a stable, AAAm rating from Standard & Poor's.

While the pool has no direct exposure to subprime investments, it did have investments in asset-backed commercial paper, some with subprime exposure. So do other portfolios managed by the SBA. And entities such as Citizens believe there may be substantial losses.

In an investment report last week, Citizens chief financial officer Sharon Binnun said the state-run insurer currently cannot access $1.3 billion of bond proceeds in the LGIP without paying penalties, which strains the agency's liquidity position.

"In Fund B is $214 million of SBA invested proceeds," Binnun told her governing board. "Citizens took an $88 million market value loss because of downgraded securities. We think that is a permanent loss. We will not know the final losses for some time. We probably won't know for a couple of years."

In response to the SBA crisis, a performance audit was ordered by Gov. Charlie Crist, Chief Financial Officer Alex Sink, and Attorney General Bill McCollum, who comprise the board of trustees overseeing the agency.

Some investments made by the SBA were improper because funds were not qualified for institutional buyers, and some trades were made by unapproved broker-dealers, said the audit by Clifton Gunderson LLP,released April 14.

"We found deficiencies in the design of the investment fund oversight and a significant level of noncompliance with investment guidelines and policies," auditors said.

Some documents requested by the SEC relate to the SBA's investment policies and legal opinions concerning the local government pool's ability to participate in Rule 144A offerings and its status as a qualified purchaser or qualified institutional buyer.

In response to the controversy and potential losses on investments, legislation was unanimously passed in both houses of the Legislature last week strengthening management and operations, as well as reporting requirements, in the SBA.

The SBA's interim director, Bob Millian, last week announced that the law firm of Berman De Valerio Pease Tabacco Burt & Pucillo was hired to assess whether the SBA should pursue legal action against the broker-dealers who sold certain investment-grade securities that were subsequently downgraded below investment grade.


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