Auction Rate Securities Explained - Seeger Weiss Law Firm

Auction-Rate Securities

Auction Rate Securities have floating interest rates that are changed based on auction prices. The auctions are held at set intervals ranging from every day to annually, though most are held on a weekly basis. Auction-rate bonds are typically issued by borrowers who want to keep the interest rates on their longer term debt lower by allowing the rate to be reset frequently. Investors who buy these bonds typically are looking for a rate of return that is generally higher than rates from the money market and which still provides a high degree of liquidity. Purchasing these bonds typically requires an investment of $25,000 or more. Many auction-rate securities are issued by educational entities and municipalities.

The Role of the Broker

The brokerages who run the auctions also can affect the ways in which the interest rates change. Many brokerages and auction agents can purchase the bonds themselves, preventing the auctions from failing, and preventing the interest rate from reflecting their true market value. The SEC recently investigated several agents and brokerages because of their lack of disclosure related to this activity.

Credit Market Crunch

Recent changes in the credit markets have brought serious changes for investors who invested in a variety of auction-rate securities. Many have been unable to liquidate their investments because of an increasing number of failing auctions. This has come as a shock to many who invested in auction-rate securities with the guidance of brokers who may have told them the investments were as liquid as money-market investments.

If you invested in auction-rate securities and are facing unexpected difficulties, or if you believe you were not fully apprised of the risks involved with investment in auction-rate securities Seeger Weiss LLP's experienced team may be able to help you. If you would like to speak with someone about your rights, please fill out the free case evaluation form and an member of Seeger Weiss's staff will contact you. Initial consultations are free of charge and do not create a legal relationship.