In testimony delivered today at the House Financial Services Committee hearing on the auction rate securities market, Leslie Norwood, managing director and associate general counsel at the Securities Industry and Financial Markets Association (SIFMA), outlined the factors which led to failed auctions and presented the steps SIFMA has taken to obtain regulatory relief for issuers and investors in auction rate securities. Ms. Norwood also highlighted SIFMA’s support of efforts to promote transparency in the auction rate securities market.
Noting that the second half of 2007 was the first time the vast majority of the auction rate securities market failed, Ms. Norwood discussed the securities’ sensitivity to credit downturns, highlighting the tightening in the credit markets and the resulting decrease in demand for auction rate and other variable rate securities which led to failed auctions.
“This credit crisis is like none we have experienced before. Conditions have changed dramatically since the middle of 2007. As problems in the mortgage market spread into the mortgage securitization, faith in the monoline insurers who insured mortgage bonds began to waiver. Investors became wary of being exposed to anything with the potential for downgrades, including any securities connected to the monoline insurers and third-party credit enhancements in general,” Ms. Norwood said. “Because of the critical role the insurers and third party credit enhancers play in the auction rate securities market, demand for auction rate securities began to sharply decline. This ultimately resulted in failures across the auction rate securities market in spite of the fact the underlying credit ratings of auction rate securities issuers have remained high.”
SIFMA’s testimony also notes that, as the demand for auction rate securities began to evaporate in 2007, many broker-dealers purchased auction rate securities in order to support auctions.
“Dealers are required by the Securities and Exchange Commission to make disclosures about auction practices and procedures, which include information such as the fact that dealers are not required to put in a bid or order and that there is no assurance about the outcome of any auction,” Ms. Norwood said. “As the credit crisis began to impact the liquidity and capital of firms and their inventory of supported auctions increased, many firms did not have the capacity to continue to support the auction rate securities market.”
In response to the increased failures in the auction rate securities market, SIFMA undertook several steps which resulted in regulatory relief for municipal auction rate securities and auction rate preferred securities, as well as for individuals invested in auction rate securities in individual retirement accounts and other qualified plans.
SIFMA’s actions during the market crisis included urging the Treasury Department to simplify the reissuance standards for state and local bonds, asking the Securities and Exchange Commission to allow municipal issuers and conduit obligors to bid through auction or purchase their own auction rate securities through dealer inventory and requesting the Financial Industry Regulatory Authority to ease its net capital rules to address the liquidity needs of customers holding auction rate preferred securities.
In today’s testimony Ms. Norwood also expressed SIFMA’s strong support for proposals from the Municipal Securities Rulemaking Board for the development of a website that would display information on the results of auctions of auction rate securities and the development of a centralized system for the collection and dissemination of market information about variable rate demand obligations.
