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Information on this page has been provided to disclose
material auction rate securities practices and procedures of Lehman
Brothers Inc. Please click the links below to view details:
Role of Broker-Dealer
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Lehman Brothers Inc. ("Lehman Brothers"
or "the Firm") has been appointed by the issuers
of various auction rates securities to serve as the designated
broker-dealer to contact existing holders and potential holders
and solicit bids for the securities and is paid by those issuers
for its services. Specifically, Lehman Brothers receives broker-dealer
fees from such issuers at an agreed-upon annual rate that
is applied to the principal amount of securities sold or successfully
placed through Lehman Brothers. Lehman Brothers will receive
broker-dealer fees from the issuer with respect to the securities
sold or successfully placed through Lehman Brothers in auctions.
Lehman Brothers may share a portion of such fees with other
dealers that submit orders through Lehman Brothers that are
filled in the auction.
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Bidding by Broker-Dealer
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Lehman Brothers is permitted, but not obligated,
to submit orders in auctions for its own account either as
a buyer or seller and routinely does so in the auction rate
securities market in its sole discretion. If Lehman Brothers
submits an order for its own account, it would likely have
an advantage over other bidders because Lehman Brothers would
have knowledge of some or all of the other orders placed through
Lehman Brothers in that auction and thus could determine the
rate and size of its order so as to increase the likelihood
that its order will be accepted in the auction and that the
auction is likely to clear at a particular rate. For this
reason, and because Lehman Brothers is appointed and paid
by the issuer to serve as a broker-dealer in the auction,
Lehman Brothers' interest in serving as broker-dealer in an
auction may differ from those of existing holders and potential
holders who participate in auctions. See
"Role of Broker-Dealer" above. Lehman Brothers
would not have knowledge of orders submitted to the auction
agent by any other firm that is, or may in the future be,
appointed to accept orders pursuant to a broker-dealer agreement.
Where Lehman Brothers is the only broker-dealer
appointed by the issuer to serve as broker-dealer in the auction,
it would be the only broker-dealer that submits orders to
the auction agent in that auction. As a result, in such circumstances,
Lehman Brothers could discern the clearing rate before the
orders are submitted to the auction agent and set the clearing
rate with its order.
Lehman Brothers may place one or more bids in
an auction for its own account to acquire the securities for
its inventory, to prevent an "auction failure" (the
lack of sufficient clearing bids which would result in the
auction rate being set at the maximum rate) or to prevent
an auction from clearing at a rate that Lehman Brothers believes
does not reflect the market for the securities. Lehman Brothers
may place such bids even after obtaining knowledge of some
or all of the other orders submitted through it. When bidding
in an auction for its own account, Lehman Brothers may also
bid inside or outside the range of rates that it posts in
its "price talk." See
"Price Talk" below.
Bids by Lehman Brothers, or by those it may encourage
to place bids, are likely to affect (i) the auction rate —
including preventing the auction rate from being set at the
maximum rate or otherwise causing bidders to receive a lower
rate than they might have received had Lehman Brothers not
bid,or not encouraged others to bid, and (ii) the allocation
of the securities being auctioned — including displacing
some bidders who may have their bids rejected or receive fewer
securities than they would have received if Lehman Brothers
had not bid, or not encouraged others to bid. Because of these
practices, the fact that an auction clears successfully does
not mean that an investment in the securities involves no
significant liquidity or credit risk. Lehman Brothers is not
obligated to continue to place such bids, or encourage other
bidders to do so, in any particular auction to prevent an
auction failure or an auction from clearing at a rate Lehman
Brothers believes does not reflect the market for the securities.
Investors should not assume that Lehman Brothers will place
bids or encourage others to do so or that auction failures
will not occur. Investors should also be aware that bids by
Lehman Brothers, or by those it may encourage to place bids,
may cause lower auction rates to occur.
The statements herein regarding bidding by Lehman Brothers apply only to the Firm's (i) auction desk and (ii) any other business units that are not separated from the auction desk by an information barrier designed to limit inappropriate dissemination of bidding information.
In any particular auction, if all outstanding
securities are the subject of submitted hold orders, the auction
rate for the next succeeding auction period will be the all
hold rate (such a situation is called an "all hold auction").
If Lehman Brothers holds any securities for its own account
on an auction date, it is Lehman Brothers' practice to submit
a sell order into the auction with respect to such securities,
which would prevent that auction from being an all hold auction.
Lehman Brothers may, but is not obligated to, submit bids
for its own account in that same auction, as set forth above.
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"Price Talk"
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Before the start of an auction, Lehman Brothers
may, in its discretion, make available to its customers who
are existing holders and potential holders Lehman Brothers'
good faith judgment of the range of likely clearing rates
for the auction based on market and other information. This
is known as "price talk." Price talk is not a guaranty
that the auction rate established through the auction will
be within the price talk, and existing holders and potential
holders are free to use it or ignore it. Lehman Brothers may
occasionally update and change the price talk based on changes
in issuer credit quality or macroeconomic factors that are
likely to result in a change in interest or dividend rate
levels, such as an announcement by the Federal Reserve Board
of a change in the Federal Funds rate or an announcement by
the Bureau of Labor Statistics of unemployment numbers. Lehman
Brothers will make such changes available to its customers
who are existing holders and potential holders that were given
the original price talk.
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"All-or-Nothing"
Bids
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Lehman Brothers will not accept "all-or-nothing"
bids (i.e. bids whereby the bidder proposes to reject an allocation
smaller than the entire quantity bid) or any other type of
bid that allows the bidder to avoid auction procedures that
require the pro rata allocation of securities where there
are not sufficient sell orders to fill all bids at the winning
bid rate.
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No Assurances Regarding
Auction Outcomes
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Lehman Brothers provides no assurance as to the
outcome of any auction. Nor does Lehman Brothers provide any
assurance that any bid will be successful, in whole or in
part, or that the auction will clear at a rate that a bidder
considers acceptable. Bids may be only partially filled, or
not filled at all, and the auction rate on any securities
purchased or retained in the auction may be lower than the
market rate for similar investments. Lehman Brothers will
not agree before an auction to buy securities from or sell
securities to a customer after the auction.
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Deadlines
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Each particular auction has a formal time deadline
by which all bids must be submitted by Lehman Brothers to
the auction agent. This deadline is called the "submission
deadline." To provide sufficient time to process and
submit customer bids to the auction agent before the submission
deadline, Lehman Brothers imposes an earlier deadline, called
the "internal submission deadline," by which bidders
must submit bids to Lehman Brothers. The internal submission
deadline is subject to change by Lehman Brothers. Lehman Brothers
may allow for correction of clerical errors after the internal
submission deadline and prior to the submission deadline.
Lehman Brothers may submit bids for its own account at any
time until the submission deadline.
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Existing Holder's Ability
to Resell Auction Rate Securities May Be Limited
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During an auction period an existing owner may
sell, transfer or dispose of a security only in an auction,
pursuant to a bid or sell order in accordance with the auction
procedures, or outside an auction, to or through a broker-dealer.
Existing holders will be able to sell all of
the securities that are the subject of their submitted sell
orders only if there are bidders willing to purchase all those
securities in the auction. If sufficient clearing bids have
not been made, existing holders that have submitted sell orders
will not be able to sell in the auction all, and may not be
able to sell any, of the securities subject to such submitted
sell orders. As discussed above (see
"Bidding by Broker-Dealer" above), Lehman Brothers
may submit a bid in an auction to avoid an auction failure,
but it is not obligated to do so. There may not always be
enough bidders to prevent an auction failure in the absence
of Lehman Brothers bidding in the auction for its own account
or encouraging others to bid. Therefore, auction failures
are possible, especially if the issuer's credit (and/or the
credit of any guarantor or insurer) were to deteriorate, if
a market disruption were to occur or if, for any reason, Lehman
Brothers were unable or unwilling to bid.
Between auctions, there can be no assurance that
a secondary market for the securities will develop or, if
it does develop, that it will provide existing holders the
ability to resell the securities on the terms or at the times
desired by an existing holder. Lehman Brothers may, in its
own discretion, decide to buy or sell the securities in the
secondary market for its own account from or to investors
at any time and at any price, including at prices equivalent
to, below, or above the par value of the securities. However,
Lehman Brothers is not obligated to make a market in the securities,
and may discontinue trading in the securities without notice
for any reason at any time. Existing holders who resell between
auctions may receive less than par value, depending on market
conditions.
If an existing owner purchases a security through
a dealer which is not a broker-dealer for the securities,
such existing owner's ability to sell its securities may be
affected by the continued ability of its dealer to transact
trades through a broker-dealer for the securities.
The ability to resell the securities will depend
on various factors affecting the market for the securities,
including news relating to the issuer (and/or any guarantor
or insurer), the attractiveness of alternative investments,
investor demand for short term securities, the perceived risk
of owning the securities (whether related to credit, liquidity
or any other risk), the tax or accounting treatment accorded
the securities (including U.S. generally accepted accounting
principles as they apply to the accounting treatment of auction
rate securities), reactions of market participants to regulatory
actions (such as those described in "Securities
and Exchange Commission Settlement" below) or press
reports, financial reporting cycles and market conditions
generally. Demand for the securities may change without warning,
and declines in demand may be short-lived or continue for
longer periods.
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Resignation of the Auction
Agent or the Broker-Dealer Could Impact the Ability to Hold Auctions
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Auction agent agreements generally provide that
the auction agent may resign from its duties as auction agent
by giving sufficient notice and do not require, as a condition
to the effectiveness of such resignation, that a replacement
auction agent be in place if its fee has not been paid. Broker-dealer
agreements generally provide that the broker-dealer may resign
upon sufficient notice or immediately, in certain circumstances,
and do not require, as a condition to the effectiveness of
such resignation, that a replacement broker-dealer be in place.
For any auction period during which there is no duly appointed
auction agent or broker-dealer, it will not be possible to
hold auctions, with the result that the interest or dividend
rate on the securities will be determined as described in
the relevant underlying documents for such securities.
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Securities and Exchange Commission
Settlement
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On May 31, 2006, the U.S. Securities and Exchange
Commission (the "SEC") announced that it had settled
its investigation of fifteen firms, including Lehman Brothers,
that participate in the auction rate securities market regarding
their respective practices and procedures in this market.
The SEC alleged in the settlement that the firms had managed
auctions for auction rate securities in which they participated
in ways that were not adequately disclosed or that did not
conform to disclosed auction procedures. As part of the settlement,
Lehman Brothers agreed to pay a civil penalty. In addition,
the Firm, without admitting or denying the SEC's allegations,
agreed to provide to customers written descriptions of its
material auction practices and procedures, and to implement
procedures reasonably designed to detect and prevent any failures
by Lehman Brothers to conduct the auction process in accordance
with disclosed procedures. Lehman Brothers can offer no assurance
as to how the settlement may affect the market for auction
rate securities.
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Participation by Issuers/Conduit Borrowers in Municipal Auction Rate Securities
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Certain municipal issuers or conduit borrowers have determined to participate in the auction of their own auction rate securities pursuant to recent guidance from the U.S. Securities and Exchange Commission. These issuers/conduit borrowers are required to provide a notice of their intent to participate in the auction and the interest rate and amounts that they will bid for and certain other detailed bidding information. This information will be available to you at www.dacbond.com.
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