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What Are Auction Rate Securities?

Auction Rate Securities (ARS) are typically corporate bonds, municipal bonds or preferred stock that frequently reset their interest rates through a dutch auction. Auction Rate Securities are unlike traditional bonds that are issued with a fixed interest rate for the life of the bond or preferred stock that specifies the dividend rate for the life of the shares. Auction rate securities are commonly issued by municipalities, to fund projects like hospitals and museums, and corporations.

A dutch auction works by trying to match companies and municipalities issuing the securities with investors who are willing to buy the securities for the least amount of interest. The process works by a broker-dealer submitting bids, on behalf of current and prospective investors, to an auction agent. The auction agent will analyze all the bids and set the next interest rate at the lowest rate possible to find enough buyers for the securities.
Auctions for most of these types of securities are held every 7, 28, or 35 days, with interest paid at the end of each auction period. Some Auction Rate Securities have daily auctions, with the coupon paid monthly. Non-daily ARS settle on the next business day, daily ARS settle the same day.

The market for Auction Rate Securities is in excess of $200 billion, with roughly half of it being composed of corporate issues. In recent years, these securities have been sold to many investors as “cash equivalents”, meaning that brokerage firms assigned little to no risk to these investments.

However, many investors have recently learned that these securities lack true liquidity. Earlier this year, ARS auctions began to fail and the broker dealers who had previously made a market in these securities stopped doing so. As a result, these securities can’t be sold and investors are unable to withdraw their money.

Legal Rights

Investment banks and brokerage houses misled investors about the safety of Auction Rate Securities.  If you invested money in these securities and you are unable to sell them, you may have valuable legal rights. Mark & Associates, P.C. and Levin Papantonio Thomas Mitchell Echsner Proctor, PA have joined forces to aggressively represent investors who have lost access to their funds. To request a free legal consultation please complete the inquiry form on this page or call 1-866-50-RIGHTS (1-866-507-4448).