UPDATE 2-Mass. asks Fidelity to buy back auction-rate debt

(Adds comments from Fidelity)

By Svea Herbst-Bayliss

BOSTON, Aug 19 (Reuters) - The top Massachusetts securities regulator urged Fidelity Investments on Tuesday to repurchase auction-rate securities that it sold to clients who are now stuck will illiquid investments.

"It is my hope that Fidelity will follow the industry trend and promptly repurchase these securities that it has sold to its customers, many of whom now find themselves unable to access money that they thought was as liquid as cash," William Galvin, the state's chief securities regulator, wrote to Fidelity's chairman, Edward Johnson III.

Galvin's letter raised the pressure on the world's biggest mutual fund company less than five days after New York regulators began probing privately held Fidelity.

"We believe the underwriters should stand behind their securities," Fidelity spokesman Vin Loporchio said, adding that the company will review Galvin's letter and respond to him directly.

Investigations into auction-rate securities have widened in recent weeks with nearly a dozen state regulators looking at how Wall Street's biggest banks sold these securities, prompting some big institutions to agree to settle.

In recent weeks, UBS AG (UBSN.VX), Citigroup Inc (C.N), Morgan Stanley (MS.N) and JPMorgan Chase & Co (JPM.N) have reached agreements with regulators, including Galvin, to buy back billions of dollars of these securities.

Now, Galvin is urging Fidelity to do the same. He told Johnson, whose father founded the company more than 60 years ago, that he wants to make sure all investors who are now stuck with the securities are compensated.

"I am sure that Fidelity understands the seriousness of this situation to its customers," Galvin wrote. "I request that Fidelity take immediate steps to resolve this matter."

Auction-rate securities had long been popular with towns and student lenders because they were considered to be almost as safe as bonds, with slightly better returns. Brokerages had sold them aggressively but in February the $330 billion market seized up amid the widening credit crunch.

Fidelity has long stressed that it does not issue, underwrite or sponsor these securities and does not act as an agent for auction rate securities.

The company has been offering the securities for nearly two years and said it has informed buyers of potential risks on its website. Only a small number of Fidelity's retail customers own these securities, Loporchio said, adding that the company is ready to answer any questions these clients may have directly. (Reporting by Svea Herbst-Bayliss, editing by Phil Berlowitz and Braden Reddall)