The Securities Industry and Financial Markets Association has told a federal court in Alabama that the Securities and Exchange Commission made irrelevant and baseless arguments in urging the court to disregard its friend-of-the-court brief in a case involving Jefferson County interest rate swaps.
In a 13-page reply brief filed late Tuesday with the U.S. District Court for the Northern District of Alabama in Birmingham, SIFMA claimed the SEC has ample legal authority to pursue its allegations of wrongdoing against three individuals and a broker-dealer in connection with the county's bond issues without regard to the county's swap issues.
This dispute over the extent to which the SEC has enforcement authority over interest-rate swaps stems from securities fraud and other charges the SEC filed April 30 against Birmingham Mayor Larry Langford, who formerly headed the Jefferson County Commission; Alabama bond dealer William Blount and his firm Blount Parrish & Co.; as well as Albert LaPierre, a lobbyist and close friend of both Blount and Langford.
The SEC charges that Blount and his firm provided Langford with $156,000 in payments and benefits through LaPierre, in exchange for Langford's efforts to ensure Blount Parrish took part in Jefferson County's five muni bond offerings and four swap agreements from March 2003 through December 2004, reaping more than $6.7 million in fees. Langford, who was having financial problems at that time, played a key role selecting the firms for the deals.
The SEC claims that the swaps are securities-based, and therefore fall within its enforcement authority, because they were based on the municipal swap index created by the Bond Market Association, which in late 2006 merged with the Securities Industry Association to form SIFMA.
The index is comprised of interest rates on bonds, which are securities, the SEC contends. Federal law bars the the commission from regulating swaps but gives it enforcement authority over securities-based swaps. The SEC also claims that two of the swaps were entered into in connection with bond transactions and are securities-based for that reason also.
Blount and Langford are fighting the SEC charges by claiming the index is not securities-based and that the commission therefore has no jurisdiction over swap agreements based on the index.
Last month, SIFMA echoed that argument, asking the court for permission to file a friend-of-the-court brief arguing that the index is based on interest rates, not securities.
The SEC responded by telling the court that the SIFMA motion was a self-serving "flawed piece of advocacy" for its member firms that seeks to negate the authority that Congress has given the commission.
But in its reply, SIFMA said that it "is implausible for the SEC to suggest that the information provided in its brief should be given no weight."
"SIFMA is not merely weighing in on a legal issue that has a bearing on its members (which, even the SEC concedes, is appropriate). Rather, in this action, it is undisputed that the claims against the defendants with respect to the county swap agreements are based on assumptions concerning SIFMA's own swap index," the industry group said. "Because SIFMA is the entity that created and maintains the SIFMA swap index, it is plainly appropriate for SIFMA to explain [its] purpose, structure, and application."
SIFMA said that the commission's assertion that the interest rates used to calculate the swap index are interest rates on securities is "of course true, but irrelevant."
"The fact that the interest rates used to calculate the SIFMA swap index are interest rates on bonds does not alter the undisputed fact that the index is an index of interest rates, not an index of securities," the group said. "The interest rates used in the [index] are derived from securities for the sole purpose of capturing a tax-exempt rate. Interest is only tax-exempt if it accrues on a municipal bond. The price, yield, value, and volatility of the bond are all irrelevant to the index. Only the rate is relevant, just as with the Libor index."
The group insisted that it is not making arguments on behalf of Langford and Blount.
"SIFMA has repeatedly pointed out that it does not take a position with respect to alleged violations of the federal securities laws in connection with certain bonds issued by Jefferson County," the group said. It added that the SEC has "ample statutory authority to seek redress for the alleged wrongdoing" with respect to the bond issues.
"Thus, contrary to the SEC's suggestion, should the court dismiss the swap-related claims, the SEC's claims based on the bond offerings would remain," SIFMA said.
The SEC had charged that SIFMA was arguing on behalf of the defendants and about issuers for which it has no expertise, such as the grounds for dismissal of the charges.
"These assertions are without basis or merit," the securities group responded.
"It is entirely appropriate for SIFMA to explain to the court why swap agreements based on SIFMA's swap index do not satisfy the narrow definition of 'security-based swap agreement' established by Congress. SIFMA is not associated with the defendents and is not making arguments on their behalf," the group said.
SIFMA said it merely told the court that it would be appropriate to dismiss the SEC's claims related to the swap agreements because the commission's "complaint does not state a claim for relief" with respect to those agreements.