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Response to RBDA Claim Is Mixed

WASHINGTON - The Regional Bond Dealers Association is pushing state and federal regulators to force the major banks and broker-dealers that underwrote auction-rate securities to provide relief to all investors who purchased ARS, not just the investors that were their customers.

RBDA believes that the settlements reached recently with a handful of Wall Street and other firms are faulty because they exclude investors who purchased the securities through secondary regional firms that merely distributed the ARS and had no advance knowledge that the ARS market was going to collapse.

"We want to make sure all investors get treated equally and fairly," said Michael Decker, co-chief executive officer of RBDA. "Just because an investor didn't buy a security directly from a leader dealer doesn't mean he or she shouldn't be treated the same as other investors."

RBDA laid out its case in an eight-page letter sent yesterday to Securities and Exchange Commission chairman Christopher Cox, New York Attorney General Andrew Cuomo, and North Dakota Securities Commissioner Karen Tyler, who is the president of the North American Securities Administrators Association. Cuomo's office and Tyler did not return phone calls, but SEC spokesman John Nester confirmed that the commission staff would consider the letter.

"We are aware of these concerns and will continue to examine them as our investigations continue," he said.

Joseph Fichera, senior managing director and chief executive officer of Saber Parners LLC, said he is sympathetic with the regional dealers' argument because "they were a customer of the broker-dealers like everybody else."

"They were probably kept as much in the dark as their customers because the market was so opaque," he said, adding that no investor should be left out of the settlements.

But a bond attorney who asked not to be named said that RBDA's one-size-fits-all approach is unlikely to hold water with the regulators still examining firms' auction-rate practices. While some regional dealers will say that they simply repeated the information they got from the primary dealers and performed some due diligence, others probably recited what they heard and sold the ARS as safe as money-market funds without checking first to see whether that is consistent with what is in the ARS offering documents.

"People need to focus on the fact that these are registered entities and they can't claim, 'I'm as dumb and as much a victim as everybody else,'" the attorney said. "What are you getting paid for if all you're being is the transmission line between the primary dealers and your customers?"

RBDA estimates that more than $60 billion of the roughly $160 billion of outstanding ARS is owned by investors who bought them from secondary dealers, but are not covered under agreements reached in the past two weeks with two UBS AG subsidiaries, Citigroup Global Markets Inc., JP Morgan Chase & Co., Morgan Stanley, and Wachovia Capital Markets.

RBDA's letter comes as regional firms have become increasingly nervous that regulators will expand their probes and seek legal action against them, sources have said.

But the dealer group argues against such legal action by noting, among other things, that regional firms had no control over the auction-rate process. The letter cites lawsuits against the firms that have revealed the extent to which primary dealers propped up the ARS market but did not disclose that fact to the market or to its customers. For instance, a June suit brought by Massachusetts' top securities regulator revealed that between Jan. 1, 2006, and Feb. 28, 2008, UBS bid on 30,367 municipal ARS auctions in order to prevent a failed auction 13,782 times - 50.9% of the those auctions.

"If the allegations ... are true and if lead managers other than UBS engaged in similar activity, the violations at the heart of the ARS market downturn stem not from problems with distributing firms at the 'point of sale' but in the relatively opaque auction process," RBDA said in its letter. "Any settlement that does not apply the same lead manager obligations to both those firms' direct customers as well as those investors who bought lead managers' ARS through other dealers would be unfair and would leave thousands of investors without a resolution."

RBDA's letter argues that lead managers are generally the only parties who have completed knowledge of and control over the auctions. For example, they are the only dealers to know the number of bidders at an auction, the individual and aggregate dollar amount of bids, the range of bid prices, whether there are sufficient bids by investors for the auction to success, and the clearing rates in successful auctions, RBDA said.

In addition, the regional group argues that lead managers who are primary dealers are in the best position to buy investors' ARS positions because they can "readily" use the illiquid ARS as collateral to borrow from the the Federal Reserve Bank of New York's Primary Dealer Credit Facility.

"Even if certain ARS were not accepted as eligible collateral under the PDCF, primary dealers could still benefit from the PDCF in financing ARS holdings by pledging other eligible collateral to achieve similar results," the letter said.

Finally, it notes that some lead managers who have already committed to buying illiquid ARS from investors have states that holding the securities would not be burdensome. Specifically, Merrill Lynch & Co., which is still negotiating with regulators, has said it "does not expect its redemption of auction rate securities in 2009 through 2010 to have a materially adverse impact on its capital rations, liquidity, or consolidated financial performance."

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