Bank of America and RBC in ARS settlement

Bank of America and Royal Bank of Canada (RBC) yesterday agreed to buy back up to $5.5 billion of auction rate securities (ARS) they issued, becoming the latest banks to reach an agreement in principle with the US Securities and Exchange Commission (SEC).

The SEC had accused Bank of America of concealing the liquidity risks of ARS from thousands of its customers, and requested that it liquidate at par many of its ARS contracts. Under the settlement, the bank will repay all individual investors, small business investors with account values up to $15 million, and charitable investors that had purchased up to $25 million in the affected securities.

Bank of America is also required to make whole any losses sustained by investors meeting the above requirements who purchased ARS from the bank before Feb 13, 2008 and sold them on at a loss. The repayments will be available until the end of November.

Additionally, the SEC requested that the bank provide up to $5 billion in liquidity to other businesses, charities, and institutional investors.

Yesterday the SEC reached another settlement in principle with RBC, which required the bank to provide up to $800 million of liquidity to more than 2,000 investors. RBC will offer to buy back ARS that it issued under the same terms agreed with Bank of America.

Both settlements made yesterday will include charges against the banks that they fraudulently employed ARS and misled customers. The banks will also pay a financial penalty once agreed obligations are met.

Since the ARS market collapsed in mid-February, many big name banks have settled charges against them, including Citi, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, Wachovia and UBS.

A spokesman at the SEC refused to comment on how many other banks have yet to reach a settlement on ARS issuance. According to New York state attorney general Andrew Cuomo, 12 institutions have now agreed to buybacks totalling $51 billion.

See also: Investors caught short by auction rate meltdown
UBS commits to $18.6 billion ARS buyback
Merrill and Citi to repurchase ARS after New York applies pressure
Banks' latest ARS settlement falls short