SEC Finalizes ARS Settlements With Citi, UBS to Buy Back $30B

The Securities and Exchange Commission yesterday announced final auction-rate securities settlements with Citigroup Global Markets Inc. and UBS AG that will provide $30 billion of liquidity to investors who have been stuck holding illiquid ARS since the market froze in February.

The settlements indicate the ARS saga is nearing an end as the top five auction-rate underwriters reported spending $2.19 billion on ARS buyback and liquidity programs in the third quarter, in financial statements they filed with the SEC.

Citi and UBS were the largest underwriters of ARS, comprising 40.2% of the market, according to data from Thomson Reuters. They were the first broker-dealers to settle with state and federal regulators, announcing the settlements in August. Since then, 21 other banks and brokers have announced settlement agreements, according to SecondMarket Inc., a New York-based clearinghouse company for illiquid ARS and other assets.

"Every one of the investors covered by these settlements will be able to receive 100 cents on the dollar on their ARS investments," SEC commissioner Christopher Cox said in a written release.

The commision is close to reaching final settlements with Bank of America NA, Merrill Lynch & Co., RBC Capital Markets Corp., and Wachovia Securities LLC, according to the release.

Separately, the New York attorney general's office announced it has discontinued its ARS investigation of Citi and UBS.

In its settlement with the SEC and the Texas State Securities Board, the lead state regulator investigating Citi for auction-rate security security abuses, the firm agreed to buy back about $7 billion in ARS. UBS agreed to buy back $22.7 billion under its final settlement with the SEC.

The figures are smaller than the total $38.1 billion the companies agreed to buy back in August because some customers were able to sell their ARS to other parties and the dollar amount for buybacks can fluctuate with market conditions, according to an SEC official. The agency said it may impose its own fines on the companies toward the end of the buyback programs.

Citi reported in its third-quarter statement that it expects to purchase $6.2 billion of ARS, including $1.8 billion of municipal ARS. The company said it recorded a loss of $425 million for buybacks in the third quarter plus $200 million in fines.

The other top auction-rate underwriters all reported charges in the third quarter related to ARS buybacks. JPMorgan Chase & Co. reported a charge of $375 million as part of a $3 billion buyback program. UBS reported a charge of $340 million, Morgan Stanley reported a $277 million charge, and Goldman Sachs Group Inc. reported a $768 million charge.

The broker-dealer buyback programs "have been well underway for some time" and customers have been "generally pleased with the redemption process," said Kevin O'Connor, managing director with SecondMarket.

Some companies are still formulating the process to begin a buyback program while other companies have redeemed all their outstanding ARS, he said. The companies are now looking for secondary market solutions for ARS or are working with clients on a restructuring effort, he said.

Auctions are still viable for some securities, O'Connor said. Certain investors comfortable with illiquid assets are drawn to the 15% interest rate some ARS can offer if the auction fails. These securities are usually from single-state issuers with high tax rates, he said.

A number of customers who bought ARS through third-party dealers still have not obtained relief and are stuck holding illiquid securities, according to O'Connor.

Fidelity Investments is the only third-party ARS dealer that has announced a buyback program. Charles Schwab & Co., TD Ameritrade, E*Trade Financial, and Oppenheimer & Co. were subpoenaed as "downstream brokerages" by New York Attorney General Andrew Cuomo.

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