(Washington, DC) — Commissioner Thomas E. Hampton of the District of Columbia Department of Insurance, Securities and Banking warns District residents to be aware of widespread problems concerning securities investments called auction rate securities (ARS). Such investments, with a total face value estimated at $330 billion, are in the form of long-term municipal bonds or preferred shares of closed-end mutual funds. Interest rates or dividends on such securities are reset at weekly or monthly auctions run by major broker-dealers.  The auction feature gives ARS the appearance of liquidity. ARS have often been sold by securities firms to investors as “cash equivalent” short-term, low-risk investment alternative to money market funds or certificates of deposit with slightly higher returns.

In February 2008, however, the credit crisis caused hundreds of ARS auctions to fail when the large investment banks stopped supporting them.  When the ARS auctions were unable to attract enough buyers, investors found they were unable to sell their auction rate securities.  Interest rates were reset to predetermined penalty rates, some as high as 18 percent.  As ARS auctions continue to fail, the ARS market remains largely frozen and investors are unable to access funds they had put into securities that they thought would act like cash. 

A number of securities regulators, nationwide, have received complaints from investors alleging that they were told that ARS were safe, liquid investments, but that they were not warned of the risks.  The North American Securities Administrators Association (“NASAA”), an association of state securities regulators, of which DISB is a member, has established an ARS Task Force that will focus on sales practices and supervisory issues related to auction-rate securities.  (For more details, go to nasaa.org.)

District residents are encouraged to contact DISB at (202) 727-8000, if they have invested in ARS and are unable to access their investment funds as promised.  To file an online complaint on any securities-related matter, please visit disb.dc.gov.

The Government of the District of Columbia Department of Insurance, Securities and Banking (DISB) regulates financial-service businesses in the District of Columbia. DISB has two overall missions: to provide fair, efficient and fast regulatory supervision of financial-service activities for the protection of the people of the District of Columbia; and to create conditions that will attract and retain national and international insurance, securities, banking and other financial-services businesses to the District.