April 23, 2008
The Honorable Christopher Cox
Chairman
U.S. Securities and Exchange Commission
100 F Street, NEWashington, DC 20549
Dear Chairman Cox:
The loss of liquidity in the market for auction rate preferred securities has hurt a number of my constituents and, we are certain, at least some constituents of every member of Congress. The fact that the root cause of this situation appears to be turmoil in the broader credit markets, and not a single market participant, does not excuse us from urgently seeking a solution. But at least one potential solution—a redemption of the preferred shares by the issuing funds—apparently meets resistance among the fund companies as a threat to interest of the fund’s common shareholders. What is the Commission’s view of this apparent conflict? Under the Investment Company Act, how do the rights and standing of investors in the preferred shares of closed-end mutual funds compare with those of common shareholders?
We would also like to know what action the Commission is taking to determine whether brokers who sold auction rate preferred securities did so using deceptive or misleading practices. We have received several reports of brokers routinely touting these securities as though they were as liquid as cash. This is obviously not the case and brokers that used inappropriate sales tactics should be held accountable.
As you are aware, the mutual fund industry is seeking exemptive relief from the asset-coverage tests that SEC fund companies believe will allow them to redeem at least some of the currently illiquid securities. We understand the Commission may be able to grant this request on a temporary basis.
We strongly urge you to consider this request and any other relief that the Commission may be able to provide in as expedient a manner as possible as they are presented.
BARNEY FRANK
PAUL E. KANJORSKI
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