Congressmen question an apparent conflict of interest between holders of auction rate securities and fund companies.
An apparent conflict of interest between holders of auction rate preferred securities and mutual fund companies was questioned in a letter sent yesterday to Securities and Exchange Commission Chairman Christopher Cox by two leaders of the House Financial Services Committee.
“The loss of liquidity in the market for auction-rate preferred securities has hurt a number of my constituents and I am certain at least some constituents of every member of Congress,” House Financial Services Committee Chairman Barney Frank, D-Mass., and Rep. Paul Kanjorski, D-Penn., who is chairman of the Financial Services Committee's subcommittee on capital markets, wrote to Mr. Cox.
“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 [the] interest of the fund’s common shareholders,” they wrote.
“What is the commission’s view of this apparent conflict?” the congressmen asked.
“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?”
The congressmen also asked: “What action the commission is taking to determine whether brokers who sold auction rate preferred securities did so using deceptive or misleading practices.”
The letter said they had received “several reports of brokers routinely touting these securities as though they were liquid as cash.
This is obviously not the case, and brokers that used inappropriate sales tactics should be held accountable.”
While questioning the conflict mutual funds may have with holders of auction-rate preferred securities, the congressmen also asked the SEC to grant the mutual fund industry temporary relief from asset coverage rules so that fund companies can redeem at least some of the illiquid securities.
