Monday, March 17, 2008

SEC Staff Acts to Thaw Frozen Auction-Rate Securities Market

In an effort to thaw the essentially frozen auction-rate securities market, the SEC staff said it would not object if municipal issuers, conduit borrowers, dealers and auction agents participated in bids for municipal auction rate securities. In a letter to SIFMA signed by the directors of the Divisions of Market Regulation and Corporation Finance, the staff conditioned the no-action relief on the prompt disclosure following the auction of detailed information concerning the bidding that occurred, including the amount of securities for sale in the auction; the number and aggregate dollar amount of bids made; the number of bidders, and the high, low and median bids received.

There should also be disclosure of any steps to avoid an auction leading to a below market clearing interest rate, such as whether the rates bid would not be less
than an appropriate benchmark, such as the relevant SIFMA municipal swap index. Further, there must be timely dissemination of the disclosures to the public, including
provision of the disclosures to nationally recognized municipal securities information repositories and the financial press, coupled with posting on publicly accessible portions of the websites of the participating dealers, the municipal issuer's and the conduit borrower.

Municipal auction rate securities are municipal bonds with interest rates that are
periodically re-set through auctions, typically every 7, 14,28, or 35 days. Municipal auction-rate securities are auctioned at par so the return on the investment to the investor and the cost of financing to the issuer between auction dates is determined by the interest rate set through the auctions. The interest rate is set through a process in which bids with successively higher rates are accepted until all of the securities in the auction are sold. The final rate at which all of the securities are sold is the clearing rate that applies to all of the securities of an offering until the next auction occurs. If there are not enough bids to cover the securities. Hundreds of auctions for municipal auction-rate securities recently have failed to obtain sufficient bids to establish a clearing rate.

The no-action letter was issued because the SEC staff learned that a contributing
factor may be the reluctance of participating dealers to purchase in the auctions due to
uncertainty regarding the staff’s views on the circumstances under which participating
dealers may accept bids from issuers desiring to participate in auctions.

Regarding disclosure, the SEC recognizes that appropriate disclosure in any particular case will depend on all the relevant facts and circumstances. Among other things, the staff believes that municipal issuers, conduit borrowers, participating dealers and auction agents should consider whether an offer to purchase subsequent to an auction is permissible under the contractual arrangements governing the particular municipal auction rate securities. Also to be considered is whether the submission of a bid by the municipal issuer or conduit borrower, or by participating dealers acting on its behalf, and the acceptance or processing of such a bid by participating dealers or auction agents, is consistent with the issuer's or borrower's disclosure documents.