NEWS & UPDATES
April, 2008 (Chicago, IL/Washington, DC) FINRA recently issued Regulatory Notice 08-08 in response to developments in the market for Auction Rate Securities. The Notice, which became effective March 6, 2008, imposed a 25-percent maintenance requirement (of the current market value) for all auction rate securities that are backed by fixed income products (e.g., municipal bonds, collateralized debt obligations, etc.). The Notice also reminded FINRA member firms that Auction Rate Preferred Securities (ARPS) that are issued by closed-end funds are subject to 100-percent maintenance margin and, thus, are excluded from the firm’s net capital. On April 11, 2008 FINRA issued an interpretive letter that temporarily suspends the 100-percent reserve requirement on ARPS.
Auction Rate Securities (ARS) are priced and traded similarly to short-term instruments. Through an auction process, interest rates adjust at predetermined periods, typically every 7, 28 or 35 days, with the frequent interest rate resets giving the security a risk-profile similar to a shorter-term security. However, many of these auctions are ‘failing’ as investors have been unwilling to participate in the auctions.
FINRA suspended the 100-percent reserve requirement on ARPS as a result of requests from SIFMA and member firm representatives seeking relief from the liquidity pressures. FINRA has temporarily suspended the 100-percent maintenance margin restriction and is allowing member firms to offer non-purpose loans collateralized by ARPS subject to certain requirements and conditions.
Houlihan Smith & Company, Inc. has been valuing ARS and ARPS portfolios for publicly-traded companies listed on NYSE, AMEX, NASDAQ, and other global exchanges, since 3rd quarter 2007.
“FINRA’s 25-percent maintenance requirement further constricts ARS liquidity. Although the temporary suspension of the 100% maintenance requirement on ARPS helps, the ARPS market is a small subset of the overall ARS universe. Further, FINRA’s actions continue to treat all ARS substantially the same, while there are enormous differences between many of the ARS issuances.”
--Andrew D. Smith, President and General Securities Principal, Houlihan Smith & Company, Inc.
HOULIHAN SMITH & COMPANY, INC. is a national investment banking firm and is the leading provider of ARS Valuation and Investment Advisory services. Houlihan has more than 125 experienced professionals and is able to efficiently handle complex client engagements. Established in 1996, Houlihan is a registered broker-dealer and FINRA member committed to the highest levels of professional standards. The Houlihan name is synonymous with valuation and deal making expertise, leveraging years of experience, reputation and relationships.
For more information regarding ARS Valuation & Investment Advisory services, please contact, Karl D’Cunha at 312.499.5900 or e-mail Karl D'Cunha
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