Mass. AG wants help for auction-rate investors

WASHINGTON—Massachusetts' attorney general and secretary of state on Thursday urged a House panel probing the collapse of the auction-rate securities market to find a way to provide timely relief for investors.

"Any solutions should actually return full investment amounts to all investors," Attorney General Martha Coakley said as she testified before the House Financial Services Committee, which is chaired by Rep. Barney Frank, D-Mass.

"Our goal is that all investors stuck in auction rate securities will be made whole and that in the not-too-distant future, the auction rate scandal will be behind us," Secretary of State William Galvin said.

The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt, except the interest rates were reset at regular auctions, some as frequently as once a week.

The securities were purchased by investors who wanted a place to park their money where it could be easily accessed. Investors have complained brokers led them to believe they were safe, liquid investments.

But starting in February, weekly and monthly auctions at which investors normally purchase such securities failed to yield buyers, as investors sought to avoid risk amid turmoil in credit markets. Many investors, including state entities and local governments, were left with their cash frozen as buyers dried up.

Galvin said there was a larger problem at work than simply the "debacle" of the failure of this particular market.

"The auction-rate security scandal is just one more variation on a recurring theme that we have seen before," he said, citing the "belief by large segments of the financial services industry that they are above the law."

Coakley's office has recovered money for municipalities and state agencies that were misled into investing in auction-rate securities by investment banks, including $75 million this year for Massachusetts governmental entities.

Galvin said his office, as well as other regulators, have entered into settlements with UBS, Merrill Lynch, Bank of America and other underwriters and sellers of auction-rate securities. The firms have agreed to repurchase tens of billions of dollars of the securities from retail and other customers.

But Galvin warned that much more needs to be done.

Among the steps Galvin suggested were more aggressive monitoring of conflicts of interest, disclosure of financial adviser incentives and tighter regulations for research reports.