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Options for Investors

Unfortunately, neither the Financial Industry Regulatory Authority (FINRA) nor the Securities and Exchange Commission (SEC) are doing enough to make sure investors have liquidity. Instead of holding the investment banks and brokerages responsible for their actions, and requiring them purchase back these securities from investors, FINRA sent out an advisory to investors that recommended several unappealing options.

The FINRA alert is below:

ARS investors who want to liquidate their holdings—but cannot because of failed auctions—have a variety of options. These include:

Continuing to Hold:

If you have no need to access the monies invested in the ARS, you may want to consider whether that above-market rate is enough for you to continue holding until the next auction, which generally will be less than a month away. There is, of course, a chance that subsequent auctions will fail as well. As noted above, the issuer may be authorized to call the instrument or convert it into a fixed or variable rate security.

Selling in the Secondary Market:

You may wish to consider selling in the secondary market to a third party. Also, although your brokerage firm is not required to purchase your ARS in the secondary market, it may be willing to do so. Your broker owes you a duty to obtain best execution, but you should keep in mind that selling outside of the auction process may make it harder to determine whether you are getting a fair value, and may result in your getting a lower price. In addition, you need to factor in the costs or fees associated with a transaction completed outside the auction.

Borrowing on Margin:

Some firms are offering to lend customers money to help them meet their cash flow needs. This may not be for everyone. For example, you should be aware that the interest rate charged on these loans may exceed the yield you are getting on the underlying security. Also, borrowing against a tax-exempt security may cause you to lose the ability to deduct from your taxes the interest or a portion of the interest on your margin loan. If you're considering this option, be sure you understand the general considerations that apply to any margin loan, notably:

• Your firm can force the sale of securities in your accounts to meet a margin call. If the ARS in your account falls below the maintenance margin requirements under the law—or the firm's higher "house" requirements—your firm can sell the securities in your accounts to cover the margin deficiency. You will also be responsible for any shortfall in the accounts after such a sale.
• Your firm can sell your securities without contacting you. Some investors mistakenly believe that a firm must contact them first for a margin call to be valid. This is not the case. Most firms will attempt to notify their customers of margin calls, but they are not required to do so. Even if you're contacted and provided with a specific date to meet a margin call, your firm may decide to sell some or all of your securities before that date without any further notice to you. For example, your firm may take this action because the market value of your securities has continued to decline in value.
• You are not entitled to choose which securities or other assets in your accounts are sold. There is no provision in the margin rules that gives you the right to control liquidation decisions. Your firm may decide to sell any of the securities that are collateral for your margin loan to protect its interests.
• Your firm can increase its "house" maintenance requirements at any time and is not required to provide you with advance notice. These changes in firm policy often take effect immediately and may cause a house call. If you don't satisfy this call, your firm may liquidate or sell securities in your accounts.
• You are not entitled to an extension of time on a margin call. While an extension of time to meet a margin call may be available to you under certain conditions, you do not have a right to the extension.

Liquidating other investments:

If you have immediate cash needs, you might also consider selling other securities in your portfolio. If you're weighing this option, be sure to think about the following factors:

• The total transaction costs that you would incur in liquidating a particular position. For instance, if you liquidate certain class shares of mutual funds or insurance linked products prior to a defined date, you could be assessed a deferred sales charge (also known as a back-end load or a surrender charge). Other costs to look out for include commissions, fees and mark-downs.
• Whether the sale will trigger adverse tax consequences. Withdrawing funds from 401(k) plans, IRA accounts or other tax deferred accounts can generate immediate taxable income and penalties. Selling securities can also require that you recognize unrealized gains, which is a particularly important consideration if your tax basis in the investment is low.
• How the liquidation will impact the balance of your portfolio. Just like securities purchases, sales should be made after considering your entire portfolio and investment objective.

Before you make such decisions, you should give serious consideration to consulting with a financial services professional and an accountant or tax advisor.

Legal Rights

None of the above mentioned options are fair to investors who purchased Auction Rate Securities because they were told they were “cash equivalents”. 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).