At a congressional hearing yesterday, the SEC said it is developing guidance with provisions for appropriate disclosures that would allow local governments to buy their own auction-rate debt without being suspected of market manipulation. SEC is responding to the strain municipalities have been under ever since the auction-rate securities market froze in January. The guidance is expected to be released this week and transparency would be a key component.
One of the SEC conditions for bidding would require an issuer to disclose certain facts related to price and quantity and the SEC would not overrule contracts that prohibit the issuers from buying debt.
There was doubt whether the SEC would allow municipalities to bid on their own auction-rate debt after their enforcement settlement with 15 brokerage firms over market-manipulation in 2006. However, this current move would provide relief to municipalities, student-loan providers, schools and others that have been faced with unusually high borrowing costs in recent weeks as investors fled amid concerns over bond insurers and the lack of liquidity in the auctions. It is estimated that more than $80 billion in securities have failed at auction, resulting in interest rates as high as 20% for some borrowers.
Additional transparency requirements may also be ahead. The Municipal Securities Rulemaking Board, which writes rules governing municipalities, has been considering changes that would increase the transparency of prices.
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