WASHINGTON - Besieged with complaints from auction-rate securities clients, Raymond James Financial Inc. has taken the unusual step of sending them letters, saying it lacks the financing necessary to buy back their ARS.

The St. Petersburg, Fla.-based firm, which disclosed in financial statements that it is under investigation by the Securities and Exchange Commission, the New York attorney general's office, and the Florida Office of Financial Regulation in connection with ARS sales, has not entered into any settlements or formally announced a voluntary buyback program.

Nevertheless, Raymond James chairman and chief executive officer Thomas A. James told investors in a four-page letter dated Jan. 2 that while the firm has been "doing everything we can to obtain liquidity as quickly as possible for all affected ... clients," it "does not have access to the necessary financing at this time to purchase at this time anything near the $1 billion [of ARS]" held by clients. The firm sent the letter to the SEC as well.

Raymond James' clients had $2.3 billion of ARS outstanding when the markets collapsed in February 2008, but that amount has been reduced to $1 billion of ARS, of which $120 million of the securities are liquid and will be called soon, James said.

About $300 million of the $1 billion are municipal ARS, spokesmen for the firm said yesterday. The rest include taxable student loan ARS as well as auction-rate preferred securities that were issued by closed-end funds sponsored by Nuveen Investments LLC.

James said the firm has received increased complaints and inquiries during the past 60 days as several major broker-dealer firms that underwrote ARS have begun to buy them back. The top five ARS underwriters spent $2.19 billion on ARS buyback and liquidity programs in the third quarter of 2008 to comply with settlements with state and federal regulators, according to company financial filings. In those enforcement cases, the regulators claimed the firms continued to push ARS to investors as safe, cash-like investments even though the market was collapsing.

"Some of the underwriters alledgedly had knowledge that auctions were failing or in jeopardy, suppressed research reports, or employed executive who liquidated their own positions while still selling to clients. They were motivated to settle," James told clients. "To the best of my knowledge, we didn't participate in those types of acts," he said, adding that he still personally owned "a large" amount of ARS.

James said one of the primary reasons that his firm has been unable to finance more buybacks is that financial institutions, because of the credit crisis, are not providing loans that are unsecured or backed by illiquid instruments.

"Essentially the whole industry still suffers from the same lack of liquidity," he told clients.

The CEO also complained that the federal government has failed to respond to repeated requests from Raymond James and other firms that it provide liquidity to the ARS market by purchasing the securities or offering federal guarantees, as it has for money market funds and some corporate commercial paper.

Further, he said that even if the firm could buy the ARS, securities regulators would not give it any "regulatory net capital" credit for the securities because they are illiquid. Under the SEC's net capital rules, firms must maintain a certain amount of "net capital" or capital reserves based in part on the assets it holds.

Additionally, Raymond James has applied to become a bank holding company, a process the firm expects to be competed by June. Some of Raymond's larger competitors were given almost immediate approval by the Federal Reserve to become bank holding companies.

Goldman Sachs Group Inc. and Morgan Stanley, the largest investment banks to survive the credit crisis and two of Raymond's competitors, received approval to become bank holding companies on Sept. 21. These firms have received funding from the Troubled Asset Relief Program.

James said that some of the large institutions have repurchased ARS "perhaps even with funds provided by the federal government for other purposes."

A spokesman for one of the broker-dealers said that many of the firms had completed their ARS buy-back programs before they received federal funds.

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