WASHINGTON - Securities and Exchange Commission chairman Christopher Cox said yesterday that state and federal regulators made it a top priority to investigate major firms' sales of auction-rate securities to retail investors but their ARS probes include all firms that sold the securities to investors, not just large primary dealers.

"Nobody gets a pass," Cox said during a press conference to unveil a new electronic disclosure system for registered companies' called IDEA. "Secondary dealers, other primary dealers that aren't part of the settlements, are being investigated." The new system, which does not apply to municipal disclosures, will replace EDGAR in late 2009.

Also yesterday, former SEC chairman Arthur Levitt leveled a blistering critique against broker-dealers and warned state treasurers that taxpayers would bear the brunt of the costs of auction-rate settlements because underwriters will pass on their cost to issuers through refinancings.

"Instead of placing the burden of a bailout on the backs of taxpayers and the colleges, hospitals, and charities, we could require the firms who sold these securities to absorb the losses and the consequential damages caused by their actions rather than simply, and passively, refinance and pass the costs on to taxpayers," Levitt said, according to the prepared text of a speech he made at the National Association of State Treasurers' annual conference in Rockport, Maine.

Levitt also criticized issuers and financial advisers for complacency and a lack of skepticism about auction-rate products.

"Treasurers and CFOs displayed a false trust in their underwriters and investment bankers - seeking them as 'advisors' instead of their competitors in the capital markets," he said. "Traditional municipal financial advisors were often far too complacent and lacked necessary skepticism. State and local governments far too often practiced, almost as an art form, a 'go-along-get-along' attitude of Wall Street. They believed what their financial advisers told them that what underwriters were doing was 'reasonable and customary.'"

"The sad reality, in this case, is that what they were doing was hardly in the issuers' best interest," Levitt added.

Cox's comments regarding the scope of the ongoing ARS investigations came a day after the Regional Bond Dealers Association sent letters to Cox and two state regulators urging them to force 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.

The regional dealer group believes that the settlements reached recently with five 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 auction-rate market was going to collapse, as it did in mid-February when broker-dealers suddenly stopped supporting it.

Regional firms have become increasingly nervous that regulators will expand their probes and seek legal action against them. RBDA maintains that legal action against distributors is unnecessary because they had no control over the auction process. Lead managers - which were primarily large Wall Street firms - were the only parties with complete knowledge of and control over the auctions, the letter said.

Michael Decker, co-chief executive officer of RBDA, reiterated the group's argument yesterday in reaction to Cox's remarks.

"When the SEC looks at this, they will find that in the context of the auction-rate mess late last year, the core of the problem had to do with the opacity of the auction process and that outside of the lead managers, there was no way for participants to know that the market had dried up," Decker said.

He added, though, that RBDA does not believe anybody should get a pass, and that if there are sales practice violations at any level at any firm, they should be investigated and there should be appropriate enforcement action.

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.

Lawsuits filed by Massachusetts Secretary of the Commonwealth William Galvin and New York Attorney General Andrew Cuomo have revealed the extent to which primary dealers propped up the ARS market but did not disclose that fact to the market or to customers.

For instance, a June suit brought by Galvin against UBS revealed that between Jan. 1, 2006, and Feb. 28, 2008, UBS bid on 30,367 municipal and student-loan ARS auctions in order to prevent a failed auction 26,023 times or in 85.7% of the those auctions.

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