Banc of America Securities LLC, Banc of America Investment Services Inc., and RBC Capital Markets Corp. have agreed to buy back at par a total of almost $5.6 billion of auction-rate securities from retail investors under preliminary settlements reached with federal and state regulators over charges they engaged in abusive ARS sales practices.
The preliminary settlements were announced yesterday by the North American Securities Administrators Association, a group of state securities regulators, and the Securities and Exchange Commission, but also include as parties the Financial Industry Regulatory Authority and the New York attorney general's office.
The agreements settle charges that the firms misled investors by telling them auction-rate securities were liquid and cash-like before the ARS market collapsed in February and left the investors stuck holding them. They are the latest in a series of such settlements under which federal and state regulators have ordered banks and broker-dealers to buy back a total of more than $50 billion of ARS from customers.
The agreement with the Bank of America firms is very similar to one announced by William Galvin, secretary of the commonwealth of Massachusetts, last month. At that time, the SEC said it would soon announce the terms of its settlement with the Bank of America firms.
In releases it issued yesterday, the SEC stated that the agreements would settle charges that the firms "made misrepresentations to [their] customers when [they] told them that ARS were safe and highly liquid case-equivalent and money market alternative investments. The liquidity of these securities, however, was premised on [the firms] providing support bids for auctions when there was not enough customer demand, and [the firms] did not adequately disclose the extent of this support to customers."
Under its settlement, Bank of America, through its subsidiary Blue Ridge Investments LLC, beginning yesterday through Dec. 1, 2009, will buy back at par from 5,500 individual investors, small businesses, and small charities $4.7 billion of ARS purchased from the firm before Feb. 13. It will also use its best efforts to provide up to $5 billion of liquidity to other businesses, charities, and institutional investors. In addition, it will meet other terms and pay $50 million of civil penalties to the states.
RBC Capital Markets, whose settlement covers its affiliates Ferris Baker Watts Inc. and J.B. Hanauer & Co., will offer by Dec. 15 to buy back roughly $850 million from 2,000 investors and will use its best efforts to provide liquidity to other larger ARS investors. It will also meet other terms and pay $9.8 million of civil penalties to the states.
The other terms agreed to by the firms include reimbursing the refinancing fees of municipal issuers who issued ARS between Aug. 1, 2007, and Feb. 11, and refinanced those securities after Feb. 11.
The firms also said they would make whole any losses sustained by any individual investors who purchased ARS before Feb. 11 or 13 and sold them at prices below par after that. In addition, they agreed to offer customers no-net-cost loans that will remain outstanding until the buybacks occur. Investors who have incurred significant damages beyond the loss of liquidity will be permitted to pursue claims against the firms through a special arbitration process overseen by FINRA.
The firms also agreed not to liquidate their own inventories of any particular ARS at par before offering to liquidate an institutional investor's holdings in that security. They said they will provide notice of the settlement terms to all investors who purchased ARS from them before the market collapsed and will establish toll-free telephone assistance lines to respond to questions from investors about the terms of the settlements.
The SEC said the firms will be permanently enjoined from further violations of rules that prohibit the manipulative use of deceptive devices by broker-dealers.
The firms each issued statements detailing the agreements and stating that they neither admit nor deny the charges.
