Regulation

BofA, RBC Will Pay Auction-rate Losers

Preliminary pacts with SEC should let thousands of investors sell back the securities purchased before the February market collapse.
Stephen TaubOctober 8, 2008

Preliminary settlements that the Securities and Exchange Commission announced with Bank of America’s Banc of America Securities unit, and with RBC Capital Markets, will give thousands of investors the opportunity to sell back to them the auction rate securities purchased before the ARS market collapsed in February 2008.

Bank of America’s settlement covers 5,500 small businesses, small charities, and individual investors. The agreement also requires Bank of America to use its best efforts to provide up to $5 billion in liquidity to other businesses, charities, and institutional investors.

Under RBC’s settlement, that company would provide individual investors, small businesses, small nonprofits, charities, and religious organizations the opportunity to sell back to RBC all of the ARS they purchased from RBC before the ARS market collapsed in February 2008. The SEC expects the settlement would provide liquidity of up to $800 million to more than 2,000 investors.

The agreement with RBS also would require RBC to use its best efforts to provide liquidity to other larger ARS investors.

What the SEC described as the “proposed settlements” included charges that Bank of America and RBC made misrepresentations to their customers when they told them that ARS were safe and highly liquid cash and money market alternative investments. The SEC said in its announcement that the liquidity of the securities was premised on the two institutions providing support bids for auctions, when there was not enough customer demand, and Bank of America did not adequately disclose this support to customers.

The SEC said that Bank of America and RBC continued to market ARS as cash and money market alternatives despite their awareness of the escalating liquidity risks in the weeks and months preceding the collapse of the ARS market. When the banks stopped supporting auctions in February 2008, there were widespread auction failures for their customers, the regulator added.

Under the terms of the agreement with Bank of America, the bank will offer to liquidate at par all ARS from individual investors, small business investors with account values up to $15 million, and charitable investors with account values up to $25 million, who purchased ARS from Bank of America prior to the collapse of the ARS market in mid-February 2008.

Under the terms of the agreement with RBC, the bank will offer to purchase, at par, all ARS from individual investors, small business investors with account values up to and including $10 million, and investors that are nonprofit, charitable, or religious organizations with account values up to and including $25 million, that purchased ARS from RBC prior to the collapse of RBC’s ARS market on Feb. 11.