Lawmakers press SEC on auction-rate debt probe

Reps. Barney Frank, D-Mass. and Paul Kanjorski, D-Pa., also urged SEC Chairman Christopher Cox to grant the mutual fund industry's request for an exemption from debt requirements that it says limit the sale of those investments, known as auction-rate preferred securities.

The lawmakers wrote in a letter to the SEC that they "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."

The letter, dated Wednesday, was released by Frank's office on Thursday.

"We share their desire to alleviate the conditions in the (auction-rate) market as appropriate under federal law," said SEC spokesman John Nester. "Separately, we are also looking at representations made to investors when they purchased auction rate securities."

Municipal governments, student lenders and investment funds issue auction-rate securities. Investment funds sell a special class of stock offering an interest rate determined every seven to 35 days at an auction.

However, those auctions failed in droves in February as an aftershock of the worldwide credit crunch, preventing investors from withdrawing their money. The market was stung by a lack of participation from cash-strapped investment banks, as well as fears that some auction-rate investments were riskier.

Lance Pan, director of investment research at Capital Advisors Group Inc. in Newton, Mass, said the letter represents an effort to "at least encourage fund families to provide more liquidity to the investor." Ultimately, he said, having investors unable to withdraw their money is damaging to an investment manager's business.

Last week, investment manager BlackRock Inc. said it expects to buy out $1.9 billion of its funds' auction-rate preferred shares, borrowing money to do so.