Sunday, March 30, 2008

Regulators Start Auction Rate Investigations

Auction rate securities are quickly becoming the next big retail investor problem. I am now getting calls almost daily from investors who say that they were sold the securities as an alternative to money market funds, and paid higher interest, and who now cannot sell their investments, which have become completely illiquid.

It will be interesting to see how these cases shake out - exactly what were investors told about these securities. One thing is certain - they were not told that they might be completely illiquid.

But that is where we are. Those investments that were the equivalent of money market funds cannot be sold. To add to the problem, UBS announced that it is going to mark down auction rate securities in its retail customer accounts on Monday - to reflect the lack of liquidity. The markdowns are reported to be up to 20% of the value of the security.

And now entering the fray is the State of Massachusetts, who is asking firms for information relating to the marketing of auction rate securities.

Hmmm, has the SEC and FINRA heard about this? Who reviewed those materials before they were distributed to investors?

Stay tuned, this is going to be big.
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