WASHINGTON - Two Bank of America Corp. subsidiaries will buy back at par about $4.5 billion of auction-rate securities under agreements reached in principle with Massachusetts' top securities regulator and the Securities and Exchange Commission to settle alleged sales practice abuses.

Commonwealth Secretary William F. Galvin announced the settlement yesterday with Banc of America Investment Services Inc. and Banc of America Securities LLC. Linda Chatman Thomsen, director of the SEC's enforcement division, said the commission will soon announce the terms of its settlement with the firm.

Banc of America Securities was the eighth-largest underwriter of ARS with 6.1% of the market share as of Aug. 6, according to Thomson Reuters. The firm is the ninth broker-dealer to settle charges with state and federal regulators that they aggressively marketed ARS to retail and other investors without disclosing the risks after the ARS market began to collapse last August.

Massachusetts' settlement with the firm was reached independent of the North American Securities Administrators Association coalition of states investigating ARS. Massachusetts has been the lead state investigating Bank of America on behalf of the coalition.

Under the tentative settlement with Massachusetts, Bank of America will buy back at par all ARS from retail investors between Oct. 1 and Dec. 31. The settlement defines retail investors as clients who have less than $10 million on deposit with the bank.

Bank of America will also buy back all ARS from "charitable entity customers," organizations that have tax-exempt status with the Internal Revenue Service and have less than $25 million on deposit with the bank. In addition, the firm will use its "best efforts" to provide liquidity for institutional investors, and will submit quarterly reports to Massachusetts detailing its ongoing efforts.

Massachusetts did not impose a fine on the firm, a spokesperson in Galvin's office said.

"With this settlement, thousands of Bank of America clients will be provided with access to billions of dollars in funds that have been frozen in the ARS market," Galvin said in a statement.

Bank of America estimated that the buyback program will make whole 5,500 ARS customers. The firm said it expects to record a pre-tax charge of $275 million in connection with the buybacks by the end of 2008.

Any ARS customers who sold their securities below par after Feb. 11 will have the difference between par and the sale price paid by Bank of America, Massachusetts officials said. The firm also will participate in an arbitration process overseen by the Financial Industry Regulatory Authority for ARS customers who claim consequential damages beyond the loss of liquidity.

Bank of America will compensate municipalities for refinancing fees on ARS debt that was issued between Aug. 1, 2007 and Feb. 11 and subsequently refinanced by municipalities after the ARS market failed.

"We certainly appreciate [our clients'] patience as we worked with the regulators to reach an agreement that would provide liquidity relief to our investors," said Jerry Dubrowski, a spokesman for Bank of America. He said New York Attorney General Andrew Cuomo is continuing his investigation into the ARS sales practices at Bank of America, and that the firm is cooperating. A spokesman in Cuomo's office could not be reached for comment.

Galvin and Cuomo have also said they are investigating regional brokerage firms that bought and sold ARS underwritten by banks to investors. Fidelity Investments, Charles Schwab & Co., TD Ameritrade Inc., E*Trade Financial Corp., and Oppenheimer & Co. were mentioned in a letter Cuomo sent to the Regional Bond Dealers Association in August saying "some disturbing facts" had been uncovered that "belie the innocent picture of downstream brokerages."

A spokesman in Galvin's office yesterday declined to comment on the status of the regional broker investigations.

RBDA has tried to discourage regulators from investigating these firms, arguing they were unaware that ARS auctions were being propped up by the underwriters in the weeks and months before the market froze. In an Aug. 15 letter to Cuomo, SEC chairman Christopher Cox, and Karen Tyler, president of the NASAA, RBDA said auction managers at banks such as UBS did not disclose to anyone, including regional dealers, that managers were bidding in their own auctions to "give the market a false sense of liquidity."

"Expecting distributing firms to buy back ARS is simply not practical ... Distributing firms were kept just as uninformed as investors," wrote Michael Decker and Mike Nicholas, co-CEOs of RBDA.

But Cox later told reporters that "nobody gets a free pass" on alleged ARS abuses.

The House Financial Services Committee chairman Barney Frank, D-Mass., has scheduled a hearing on ARS for Sept. 18. Representatives of the Securities Industry and Financial Markets Association, as well as regulators, are expected to testify.

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