Don't Mess With Texas -- One Approach To The Auction-Rate Securities Mess

On July 22, 2008, the Texas State Securities Board announced that it may suspend the licenses of some or all of UBS's Texas-licensed brokers who sold auction-rate securities ("ARS") to brokerage customers, until their customers have the ability to liquidate the ARS in their accounts at par.  A hearing is scheduled for September.  One would have to imagine that Texas's non-nonsense approach will be effective.  It will be interesting to see whether Texas takes the same approach with the other major broker-dealers.

Posted by Paul Malmfeldt on August 5, 2008.

Update: On August 11, 2008, UBS reached a settlement with Massachusetts, New York, and Texas. 

From the Texas State Securities Board press release:

Under the terms of the settlement, UBS will buy back, no later than October 31, 2008, all illiquid auction rate securities from all UBS retail customers, including charities, who have less than $1 million on deposit. In addition, no later than January 2, 2009, UBS will buy back all illiquid auction rate securities from all other UBS retail customers, charities, and small to mid-sized businesses. These customers, who number approximately 40,000 nationwide, have been unable to sell their securities since February 13, 2008.

UBS will also:

• Fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed in February 2008;
• Consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds, in which UBS will not contest its liability for the illiquidity of the auction rate securities and in which UBS will pay all forum fees;
• Undertake to expeditiously provide liquidity solutions to all other institutional investors, with regular progress reports and subject to an outside deadline of June 30, 2010; and
• Reimburse all refinancing fees to municipal issuers who issued auction rate securities through UBS since August 1, 2007, and who refinanced those securities after the market failed.

As part of the settlement, UBS will pay the State of New York a civil penalty in the amount of $75 million. UBS will also pay a separate civil penalty of $75 million to the other states collectively.