In the News: Recent Developments

March 17, 2008

Muni Regulator Plans Improved Auction-Rate Disclosure (Update2)

By Darrell Preston

Published in Bloomberg News / BusinessWire

March 17 (Bloomberg) — U.S. municipal bond regulators proposed a plan to improve disclosure in the auction-rate securities market by requiring dealers to disclose more information to borrowers and owners of the debt.

The Municipal Securities Rulemaking Board issued a request for comments on its plan to require dealers who run auctions that determine rates on the bonds to report information on results to a central site, the board said in a press release.

The $330 billion market for auction-rate securities collapsed in mid-February after dealers stopped buying unwanted securities, driving up borrowing costs for state and municipal governments and leaving investors unable to sell their bonds. Issuers and bondholders had routinely relied on bankers’ support, without ever knowing how frequently dealers stepped in to bid for the securities.

“The MSRB remains concerned about the lack of information available to market participants regarding municipal auction- rate securities and other short-term instruments,” the board said in the release from its Alexandria, Virginia, office. “There is no source of comprehensive same-day information about auction-rate securities available to non-market professionals.”

The board said it proposed the disclosure system because borrowers and investors lack access to basic information such as the rates at which auctions clear. Under the proposed rules, auction results would have to be reported to the MSRB by 5 p.m. New York time on the day of an auction and the results would be displayed immediately on a Web site.

‘Right Direction’

The MSRB makes rules for the municipal bond market and the U.S. Securities and Exchange Commission oversees enforcement. About $160 billion, or half, the outstanding auction-rate securities were sold by municipal borrowers. Auction-rate securities are long-term bonds with rates that reset weekly or monthly.

The proposal could go further and faster in providing enough information on the market, said Joseph Fichera, chief executive of Saber Partners, a financial adviser. The clearing rate “is of little value” without more information on bidding results, information on the other bids in an auction and the credit quality of the bonds, he said.

“It’s a step in the right direction,” said Fichera. “It will require multiple steps for an investor to figure out what is going on. Investors need to be able to make comparisons and distinctions among issuers. Not all auction securities are alike.”

More Information

The MSRB’s request for comment also asked various segments of the municipal bond industry to address other proposals it may consider for improving disclosure about the bidding in auctions. Specific bid information may include the number of bidders; whether a bidder is the dealer for its own account; the number and dollar amount of bids; details about the number, interest rates and amount of bids by the dealer and other participants, and, high, low and median bids. Comments are due by April 21.

“We want to build a transparency system that will accommodate all the types of data that people think is helpful,” said Lynnette Hotchkiss, executive director of the MSRB, in an interview. “We want industry comments on what kind of information would be useful.”

While gathering comments can be a “lengthy process,” Hotchkiss said the board would move “as expeditiously as conceivably possible.”

The SEC discussed appropriate disclosure of auction-rate securities bidding in a March 14 letter to the New York-based Securities Industry and Financial Markets Association. The SEC said auction-rate disclosure should include some of the items the MSRB is asking for comments about, including details about bidding by the auction dealer, according to the letter.

The association, which represents 650 securities firms, plans to file a response the MSRB’s proposals, the company said in an e-mail from Katrina Cavalli, association spokeswoman.

—Editor: Beth Williams, Stacie Servetah

—To contact the reporter on this story: Darrell Preston in Dallas at +1-214-954-9454 or

—Last updated: 2008-03-17 16:42 (New York). (Adds MSRB comments in the 10th and 11th paragraphs.)

— To contact the editor responsible for this story: Beth Williams at +1-212-617-2307 or

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