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SEC's Municipal Securities Chief Calls for Review of Auction Rate Market

Martha Mahan Haines, the chief of the SEC's Office of Municipal Securities, recently called for a closer examination of the auction rate securities market. The ARS market for municipal securities is fragmented by a large number of dissimilar offerings, she said. It has a decentralized over-the-counter market structure and lacks transparency, all of which inhibits market efficiency. Haines raised concerns that investor and issuer confidence may be undermined unless broker-dealer involvement is addressed, including a review of the disclosure in offering documents. Her remarks at a Chicago conference for women in public finance were posted on the SEC's Web site.

Haines explained that in single broker-dealer auctions, the broker-dealers often directly or indirectly set or affect the rates. While broker-dealers maintain that their intervention is good for the market, Haines said that claim has not been examined. While there have been few failed actions, Haines questioned whether broker-dealer intervention disguises the true liquidity risk, volatility and fragmented nature of the market from issuers and investors.

Haines believes that the offering documents should clearly disclose that broker-dealers often intervene in auctions, bid with knowledge of other bids, submit bids after the internal bidding deadline for investors, and frequently directly or indirectly influence or set the clearing rate. She encouraged issuers to raise questions about the frequency of broker-dealer bidding, their policies and procedures, and any activities that may affect the clearing rate.

Haines said it may not be accurate to refer to the process as an auction at all since in a true Dutch auction no bidder knows the bids that have been submitted by others. In her view, the lack of transparency with respect to the actual rates set in the auctions undermines market integrity and investor confidence. She suggested that giving investors, issuers and broker-dealers a way to monitor the rates, the bidding ranges, and the number of bids received would promote market integrity, enhance investor confidence and improve pricing efficiency.

Haines also discussed the Municipal Securities Rulemaking Board's request for comment on a proposal to institute an "access equals delivery" model for official statements. The proposal is modeled after the concept used for prospectus dissemination in the registered securities market. There is no equivalent to the EDGAR system in the municipal market and only half of the official statements are submitted electronically.

Under the MSRB's proposal, electronic official statements would be available to the public for the duration of the new issue disclosure period, at a minimum. All submissions would have to be made electronically, which would require certain operational changes in the industry.

The MSRB believes that requiring underwriters to submit official statements electronically would enhance the timeliness and efficiency of their delivery. The proposal is only a concept under discussion for the municipal market, Haines noted, and would be subject to comment after being submitted to the SEC for approval.

Haines also offered some lessons from the city of San Diego's alleged underfunding of its pension plan and its illegal sewer rates. Because of allegedly misleading statements and omissions in its financial reports and disclosure documents, San Diego has not been able to access the public market. Haines remarked on how much cheaper and easier it would have been if San Diego had taken preventative measures and avoided its current situation. She recommended that other municipalities read the Kroll report which outlines what went wrong and how to prevent another occurrence. The findings in the Kroll report may assist other cities in improving their disclosure practices, she said.