Investor Protection Guide: Auction Rate Securities

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Auction rate securities (ARS) are debt or preferred equity securities whose interest rates are periodically reset through auctions and which are issued with long-term maturities or in perpetuity. ARS were promoted as being as safe as certificate of deposits (CDs), but with a better yield than CDs or money market funds. Consumers were told they would have easy access to their investments. However, because ARS are typically long-term variable rate debt with interest payments determined on a 7, 28, or 35-day basis, when rates rise, interest expenses and volatility will rise, making ARS a higher-risk investment than fixed-rate debt. The auction market collapsed in February 2008, and investors holding such securities have been unable to liquidate their investments. The ARS market is now generally defunct.

For more information, see:

  • Securities and Exchange Commission (SEC):
    • The SEC Cease-and-Desist Order of 2006.
  • Securities and Exchange Commission (SEC):
    • The SEC provides background information about ARS.
  • Financial Industry Regulatory Authority (FINRA):
    • FINRA’s Special Arbitration Procedures for Investors Involved in Auction Rate Securities Regulatory Settlements.

See e.g.; Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98 (2d Cir. 2012)

See also In re Merrill Lynch Auction Rate Securities Litigation, 704 F. Supp. 2d 378 (S.D.N.Y. 2010)

[Last updated in March of 2023 by the Wex Definitions Team]