The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are looking into how brokers sold auction-rate securities after receiving an avalanche of complaints from investors who said they were misled into buying the now illiquid securities.
FINRA is asking financial companies for a breakdown of total auction-rate-securities holdings by customer type, how auction-rate securities are categorized on customer statements, how firms marketed the products and the number of customer complaints related to auction-rate securities the firms have received since Oct. 1.
Recently, FINRA began a broad probe into industry practices (aka sweep investigation) in regards to auction-rate securities. However, this move doesn't necessarily mean enforcement action will take place. The SEC is also working with FINRA to look into how brokers represented the auction-rate securities when investors purchased them.
Massachusetts regulators are also getting into the investigation action. Last month they subpoenaed UBS AG, Merrill Lynch, and Bank of America for documents and testimony on how they sold auction-rate securities to retail investors.
Auction-rate securities are bonds issued by municipalities, student-loan agencies and closed-end funds that have interest rates reset at auction every week to a month. The recent credit crunch led to the collapse of this $330 billion auction-rate market, leaving investors with assets tied up in securities no one wants to buy. Brokers had marketed auction-rate securities as liquid, super-safe investments with interest rates slightly better than traditional money-market funds. Investors are now questioning why they weren’t warned about the possibility of failed auctions.
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