Risk & Compliance

Frank Prods SEC to Study Auction-Rate Havoc

House Financial Services chairman questions what's been done to learn whether the securities were sold under false pretenses.
Sarah JohnsonApril 24, 2008

House Financial Services Committee Chairman Barney Frank wants to know what the Securities and Exchange Commission is doing to investigate the sale of auction rate securities and the havoc caused in that market this year.

The Massachusetts Democrat and Rep. Paul Kanjorski, chairman of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, sent a letter to SEC Chairman Christopher Cox on Wednesday questioning whether brokers who sold the securities “did so using deceptive or misleading practices.”

It’s a question that state and federal regulators have been looking into after the auction-rate market tanked in recent months. For more than two decades, the securities were considered safe and liquid investments because their interest rates reset at periods of either 7, 28, or 25 days. In fact, many companies recorded them as cash equivalents on their balance sheets.

That all changed earlier this year when auction-rate investors found that they couldn’t offload them. Among the frantic investors have been major corporations, which were forced into taking millions of dollars in impairment charges to account for their losses. In turn, lawsuits have been filed accusing financial firms such as Merrill Lynch, Deutsche Bank, Morgan Stanley, and Citigroup of falsely marketing the securities as liquid investments.

New York Attorney General Andrew Cuomo has reportedly subpoenaed 18 banks and securities firms, and the SEC itself has queried the biggest ARS sellers on the identities of the brokers who sold them in order to drill down what pretenses the securities were sold under.

“We have received several reports of brokers routinely touting these securities as though they were liquid as cash,” Frank and Kanjorski wrote. “This is obviously not the case, and brokers that used inappropriate sales tactics should be held accountable.”

The congressmen’s letter recommends that the SEC quickly give mutual fund companies temporary relief from the regulator’s asset-coverage tests so that they can redeem some of the illiquid securities.

4 Powerful Communication Strategies for Your Next Board Meeting