Auction Rate Securities
Conclusion of ARS Global Settlement Offer
Wachovia Securities1 has concluded its offer to repurchase Auction Rate Securities (ARS) under the global settlement with the North American Securities Administrators special task force, the Attorney General for the State of New York and the Securities and Exchange Commission.
Under its agreement with regulators, Wachovia Securities offered to repurchase ARS from customers who purchased ARS from them on or before February 13, 2008. The repurchases took place in two phases. In November 2008, Wachovia Securities offered to repurchase eligible ARS from individuals, charities and small businesses. During June 2009, eligible businesses and non-dealer institutions with more than $10 million in assets held at Wachovia received an offer to repurchase qualifying ARS. As part of its settlement, Wachovia Securities also offered customers with ARS eligible under the settlement an opportunity to take a loan with the eligible ARS as collateral until such as time as the ARS repurchases took place. In addition the settlement offered customers with eligible ARS reimbursement for loan expenses, relief for customers who sold below par and alternatives for seeking consequential damage claims.
Wells Fargo Investments2 has concluded its offer to repurchase ARS under the global settlement with the North American Securities Administrators special task force and the Attorney General for the State of California.
Under the agreement with regulators, Wells Fargo Investments offered to repurchase eligible ARS from customers who purchased such ARS from them on or before February 13, 2008. The buyback offer was generally available to Wells Fargo Investments’ retail clients, individual investors, certain 501(c)(3) charitable organizations and any other customers having less than $10 million in investible assets as of January 31, 2008. Eligible investors were provided notice of the offer to repurchase eligible ARS and provided a 60 day period in which to accept. For those eligible investors who did not respond to the first buyback offer, Wells Fargo Investments made a second offer to repurchase eligible ARS. In addition, Wells Fargo Investments reimbursed those investors that it identified as having sold eligible ARS below par value between February 13, 2008 and November 18, 2009 the difference between the price that the investor received and par value of the ARS. Under the terms of the settlement, Wells Fargo Investments participated in a special arbitration process to resolve any investor consequential damage claims that may have arisen due the inability of the investor to sell the ARS.
The period of time under the settlement that Wachovia Securities and Wells Fargo Investments were obligated to buy back eligible ARS has expired.
Overview of Auction Rate Securities
For a detailed discussion of the features and risks of ARS, investors should review “ARS:Overview, Features and Risks (PDF).”
There are two varieties of ARS: long-term bonds that earn variable, short-term coupon payments, and perpetual preferred stock that pays variable, short-term dividends. ARS rates are determined through a periodic auction process, or formulaically as detailed in the prospectus, in the event of a failed auction. Municipal entities may issue tax-exempt or taxable auction rate bonds for municipal purposes. Auction rate preferreds are typically issued by corporations and may offer specific tax benefits to corporate purchasers. Auction rate preferred shares are primarily issued by investment management companies, which may issue either tax-exempt or taxable ARS depending on the unique characteristics of the investments made by the investment company3.
ARS help issuers diversity their funding structure because they pay at variable, short-term rates while traditional bond issues pay a fixed, long-term rate. ARS rates are typically reset every seven, 28, 35 days or longer depending on the issue. While municipalities or corporations issuing ARS may use the proceeds to fund specific projects or for general purposes, investment companies use the proceeds from the sale of ARS to invest in other securities to be held by a closed-end mutual fund, as described in the fund’s prospectus. As long as the closed-end fund’s rates of return on the investments purchased with the proceeds from the sale of ARS exceed the rates the fund pays on the ARS, the fund earns the difference, or “yield spread” between the two rates. The yield spread may be passed on by the investment company to its shareholders in the form of higher dividends.
Our Practices and Procedures for Auction Rate Securities
Please review Wells Fargo Advisors’ “Auction Practices and Procedures (PDF)” for a discussion of the firm’s auction procedures.
Understanding the typical terms and descriptions of the auction practices is crucial when you invest in ARS through Wells Fargo Advisors, but because each security is different, investors should review the disclosures of the auction agent and other broker-dealers participating in the auction for a specific ARS in which they wish to invest. Printed copies of offering documents, Wells Fargo Advisors ARS disclosures and those of other auction participants, and other general educational information concerning ARS can be obtained from a Wells Fargo Financial Advisor.
Our Statement Pricing Practice
Wells Fargo Advisors follows specific practices for pricing ARS on monthly account statements. For a discussion of the firm’s current ARS statement pricing practices, please review “ARS Pricing Practices (PDF).”
1On or about May 1, 2009, Wachovia Securities changed its name to Wells Fargo Advisors.
2On or about January 1, 2011, Wells Fargo Investments changed its name to Wells Fargo Advisors.
3 Income from tax-exempt ARS is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT). Wells Fargo Advisors is not a tax or legal advisor.