The letter noted that “[t]he 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.” Thus, the letter urged the SEC to take action in two areas: (1) investigation of whether “brokers who sold auction rate preferred securities did so using deceptive or misleading practices”; and (2) consideration of “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.”
As to the first issue, the letter states that Representatives Frank and Kanjorski “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 to the second issue, the letter states that “the mutual fund industry is seeking exemptive relief . . . [w]e 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.” The “exemptive relief” referred to in the letter concerns the potential creation of an exemption to regulations limiting the levels of illiquid assets that certain types of mutual funds are permitted to purchase or hold. One recent proposal under discussion between the SEC and the mutual fund industry would create an exemption to liquidity requirements for money-market mutual funds purchasing auction-rate securities with a put feature provided by a liquidity provider.