Thursday, April 17, 2008

Auction Rate Bonds

"We're all getting complaints on a daily basis from retail investors and they all have the same story: they were told by their brokers these were safe as cash and they're not,'' said Bryan Lantagne, the securities division director for Massachusetts Secretary of State William Galvin and head of the task force.

Regulatory scrutiny of Wall Street has been growing since the $330 billion auction-rate market collapsed in February, leaving some issuers paying higher penalty rates and investors unable to sell their securities. The Securities and Exchange Commission last week said it is working with the Financial Industry Regulatory Authority, which oversees brokerages, to examine firms' disclosures to clients who purchased the bonds.

The Massachusetts Secretary of State's office said on March 28 that it subpoenaed information from UBS AG, Merrill Lynch & Co. and Bank of America Corp. regarding the sale of the securities to investors in the state. A number of individuals have also filed lawsuits against Wall Street banks that sold the bonds.

Auction-rate securities are long-term bonds sold by municipalities, student loan corporations and closed-end funds with interest rates that are reset on a weekly or monthly basis. Much of the debt was guaranteed by bond insurance companies that also backed subprime mortgage-related securities.

In addition to Massachusetts, the nine-member task force includes regulators in Florida, Georgia, Illinois, Missouri, New Hampshire, New Jersey, Texas and Washington, according to a news release from the North American Securities Administrators Association. Other states are prepared to participate in the task force, Lantagne said.

"If the product was represented as a cash equivalent going in, it must be treated as a cash equivalent coming out," Karen Tyler, the securities commissioner in North Dakota and president of the North American Securities Administrators Association, said in a statement.

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