March 25 (Bloomberg) -- Someone still believes in the auction-rate securities market.

Believe it or not.

On March 17, the Municipal Securities Rulemaking Board, the self-regulatory organization that covers the municipal market, put out a request for comment on a plan to increase transparency on auction-rate securities.

That won't be hard to do, as the board observes: ``Currently, there is no source of comprehensive same-day information about Auction Rate Securities available to non- market professionals,'' the board said in its request for comment.

Among the things the board is interested in making available on a daily basis are the number of bidders, the interest rate for the next reset period, the dollar amount of securities auctioned, and bids made by either the issuer of the securities or the bank running the program.

The board observed that trading in long-term securities with interest rates reset every few days or weeks makes up about 25 percent of all transactions -- or at least it did before dealers late last year stopped supporting auctions. About 70 percent of auctions in the once-$330 billion market now fail, according to data compiled by Bloomberg News.

States and localities make up about half of the auction- rate market, and they are exiting it as fast as they can, refinancing their debt to fixed rates.

Penalty Rates

That's because when auctions fail, issuers have to pay a penalty rate, sometimes in the double digits. Municipalities don't like paying 16 percent to borrow money in a market where top-grade issuers can borrow for 20 years at less than 5 percent.

It's a much different story for the issuers of preferred shares in closed-end funds. The penalty rates in that part of the market are either manageable or negligible, and so there is little incentive for issuers, such as BlackRock Inc. and Pacific Investment Management Co., to refinance.

This has resulted in thousands of investors in the preferred shares getting stuck with investments they can't get rid of. They are plenty steamed, especially because their brokers assured them that these securities were a cash equivalent.

A number of the big fund companies, such as Nuveen Investments Inc. and Eaton Vance Corp., earlier this month said they were working on ways to restructure the shares so that investors would be able to get ``liquidity at par.'' Other companies said they were considering the matter, and advised the nervous, the angry and the disillusioned to sit tight.

Who Buys?

The MSRB in its request notes helpfully that while most variable-rate demand obligations are sold in $100,000 minimum denominations, most auction-rate securities are sold in $25,000 pieces, ``which suggests that these securities are marketed to retail investors.''

I'm still getting e-mail on this situation. Closed-end- fund, preferred-share holders, at least the ones I've heard from, are livid at the fund companies and feel betrayed by their brokers. I find it very odd that the fund companies and the brokerage houses feel that they can alienate this crowd.

Who buys auction-rate securities? It's not just ``the rich.'' I've heard from self-employed people who thought it was a good, temporary place for their life savings, at least until they decided what else to invest in. I've heard from people who sold businesses and put the money there, and from people who inherited some money and did the same.

The amount of money ranges from $50,000 to several million dollars. In each case, the investors say they were advised by their brokers that their money was in a cash equivalent. The investors rarely looked at prospectuses.

Cold Comfort

One man sent me the brochure he received for Nuveen's tax- free preferred shares. ``A Great Place for Short-Term Money,'' the brochure said, also describing the shares as a ``cash alternative before choosing your next longer-term investment.''

And yet right there on the next page of the brochure it says that the investment ``provides (but does not guarantee) liquidity at par through weekly auctions.'' A couple of pages later, it says, ``If there is a lack of buyers for all available shares, then the auction will be postponed.'' It also says, ``To date, no Nuveen MuniPreferred auction has ever been postponed.''

Nuveen and a couple of other big fund families are working on the problem. That's cold comfort to the investors who were anticipating using the money to pay their tax bills or to make down-payments on houses.

Maybe the MSRB is right, and the auction market will come back. After all, 30 percent of auctions still succeed.

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net

Last Updated: March 25, 2008 00:01 EDT