Auctions ARS as Investments: Good, Bad, and Ugly
September 1, 2008 07:14

The thrill of it all: Long-term investments like auction rate securities (ARS) have a short-term twist -- the interest rates or dividends they pay are reset at frequent intervals through auctions.

That's not necessarily a bad thing but recently the credit market has caused many auctions to fail. ARS investors who thought these securities were a ready source of cash are now short on funds. Loss of liquidity does not mean that you cannot ever get your money back. But, if you need money now, any illiquid investment can be a financial hardship.

ARS auctions can fail when supply exceeds demand-when there are not enough bids to purchase all the securities offered for sale in the auction. When an ARS auction fails, current investors will continue to hold their securities and will generally receive an interest rate or dividend set above market rates for the next holding period-up to any maximum disclosed in the offering documents.

Due to the failing credit market-a significant number of auctions have failed, leaving some investors who counted on immediate access to their funds wondering - what next?
Hold on if you don't need the money right away

Borrow money but this is not without risks and great expense - read the fine print. The brokerage firm you are dealing with can force the sale and also may sell without contacting you or may increase their house maintenance without contacting you.

Liquidate other investments. Beware of tax consequences.

Ask your broker whether any ARS you hold are eligible for redemption. If so, and if the redemption is partial, your brokerage firm should be able to tell you what procedures it is following to allocate shares among its customers.

If you think your broker has acted inappropriately, contact Anapol Schwartz. You may be eligible for a securities litigation lawsuit.

Source: FINRA