Funds News

Small U.S. brokers push for expanded ARS buybacks

NEW YORK, Aug 18 (Reuters) - A group of regional brokerages wants state and federal regulators to expand the scope of their auction-rate securities settlements to ensure all investors can sell the illiquid bonds.

The Regional Bond Dealers Association is urging the U.S. Securities and Exchange Commission, the attorney general of New York and other state authorities to demand that primary bond dealers repurchase ARS from any customer who bought them, regardless of which firm distributed the securities.

Of the $160 billion of ARS still outstanding, about $60 billion are owned by investors who bought them from secondary dealers, the RBDA said on Monday. These investors are not covered under agreements struck with Citigroup C.N, UBS UBSN.VX and three other banks.

The five banks have agreed to buy back billions of dollars of ARS to settle charges that they misled investors about the debt’s risk. The buybacks apply largely to retail customers, charities and small to mid-size businesses.

ARS are long-term debt that is priced weekly or monthly though auctions that offer the opportunity to cash out.

Michael Decker, co-CEO of the RBDA, argues that lead dealers ought to buy back ARS because they controlled every aspect of the auctions and kept regional brokerages in the dark when the ARS market began to sour.

“There are thousands of investors who own bonds from the auction programs but who are not covered by terms of these deals,” Decker said.

Officials from the SEC were not immediately available for comment. The office of New York Attorney General Andrew Cuomo declined to comment.

Decker said the agreements signed by Citi, UBS, Wachovia Securities WB.N, Morgan Stanley MS.N and JPMorgan Chase & Co JPM.N are preliminary and can be amended.

The RBDA says lead dealers have an obligation to buy back illiquid ARS, or make some other form of compensation, because they oversaw the auctions. Lead dealers propped up struggling auctions in 2007 as the credit crunch worsened, before giving up and letting the auctions fail outright in late January 2008. The market, essentially as liquid as cash for the past 25 years, has been frozen ever since.

Regional brokerages “were not the ones controlling the information about the market downturn,” Decker said.

Smaller brokerages are concerned that they will be required to make their customers whole, repurchasing ARS. Unlike the big firms, though, regional dealers have far less capital to support long-term holdings of illiquid securities.

Decker said big firms also can draw on financing from the Federal Reserve’s primary dealer credit facility. Big firms conceivably could pledge the ARS they buy back to the Fed as collateral, he said. (Editing by John Wallace)