Auction-rate securities, a small sector of the securities market that proved to be a poor money fund substitute when the market froze at the beginning of last year, returned to the news yesterday. TD Ameritrade announced a partial ARS buyback (see press release and FAQ), and the SEC issued charges against broker Morgan Keegan.

Yesterday's Journal, in an article entitled, "TD Ameritrade to Return Money," said, "Auction-rate securities, short-term debt instruments whose prices reset in periodic auctions, caused billions of dollars in losses for investors after the $330 billion market collapsed in early 2008."

TDA said in its release, "TD Ameritrade will offer to purchase, at par, eligible auction rate securities (ARS) that were purchased through the firm by certain retail investors on or before Feb. 13, 2008, provided they were not transferred out of the firm before Jan. 24, 2006, resolving pending investigations into its sale of the securities."

Fred Tomczyk, president and chief executive officer, added, "Given our financial strength and the ongoing illiquidity in the auction rate securities market, initiating a buy-back program of this nature is the right thing to do for our clients. While our role in the market for these securities was significantly different from that of other financial institutions that have previously announced similar programs, we believe this is the best way for us to help clients who have been unable to find liquidity in the current market environment."

Also, yesterday's SEC release on Morgan Keegan says, "The Securities and Exchange Commission today charged Tennessee-based broker-dealer Morgan Keegan & Company, Inc. for misleading thousands of investors about the liquidity risks associated with auction rate securities (ARS), and the agency is seeking a court order requiring Morgan Keegan to repurchase the illiquid ARS from its customers. The SEC alleges that Morgan Keegan misrepresented to customers that ARS were safe, highly liquid investments that were comparable to money market funds. Morgan Keegan sold approximately $925 million of ARS to its customers ... but failed to inform its customers about increased liquidity risks for ARS even after the firm decided to stop supporting the ARS market in February 2008."

"Morgan Keegan was clearly aware that the ARS market was deteriorating, but it went so far as to actually accelerate its ARS sales even after other firms' ARS auctions began to fail," said Robert Khuzami, Director of the SEC's Division of Enforcement. "As we've done in our enforcement actions against other firms, the SEC is firmly committed to restoring liquidity to Morgan Keegan customers who purchased ARS."

For more on ARS, see Crane Data's Aug. 9, 2008 article "Auction Rate Securities Brokers Settle; Mess Approaching Resolution?" or search for "auction rate securities" on http://www.cranedata.com.

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