Compliance June 10, 2009

California Settles with BofA over ARS

Banc of America Securities and its broker/dealer arm will return more than $3 billion to investors in California to settle alleged violations of the sales of auction-rate securities (ARS).
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California Department of Corporations today announced the settlement agreement with Banc of America Securities and Banc of America Investment Services, Inc., the investment banking and securities broker/dealer arm of Bank of America (BofA). The agreement will settle an investigation alleging that the bank misrepresented ARS to investors as safe, cash-equivalent products, even though the products faced increasing liquidity risk, according to a press release.

“This multi-billion-dollar agreement represents significant relief for many individual and small business investors who lost access to funds in the collapse of the auction-rate securities market,” said Deputy Commissioner Alan Weinger in the release. “We are pleased that the outcome of these negotiations will result in the return of money to many investors who suffered by the freezing of their assets when the auctions failed.”

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Under the settlement with BofA, the brokerage has made repurchase offers to all individual, small-business, and charitable institutional investors in auction-rate securities from California. For other institutional investors, BOA is required to continue to use their “best efforts” to work with issuers of ARS, state and federal regulators, and other interested parties to attempt to provide liquidity solutions by December 31, at which point further action may be taken if no solution is provided, according to the release.

Terms of the settlement also provide that BofA pay administrative penalties to the state and agree to abide by a desist and refrain order prohibiting violations of California’s securities law, including failure to supervise its employees in the sale of ARS.

Regulators on both the federal and state level are investigating ARS violations. Earlier this week, the Securities and Exchange Commission announced settlements with three banks, including BofA (see “SEC Finalizes ARS Settlements with Three Banks“).

Data & Research June 10, 2009

Couples Show Little Financial Confidence in Each Other

Fidelity Investments’ second Couples Retirement Study, first fielded in 2007, show that despite two years of unprecedented economic and financial instability, husbands and wives have done little to improve their communication, planning, and management of retirement finances.
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The study found couples are out of sync on critical retirement decisions: 60% of couples don’t agree on their respective retirement ages, 44% are not in agreement on whether they will work in retirement, and 42% have different ideas regarding their expected lifestyle in retirement, according to a release of the results. Only 38% of couples jointly discuss investment decisions for retirement savings.

Couples generally agree what unpredictable financial issues in retirement concern them most, citing health care expenses (57%), inflation’s impact on savings (41%, an increase of 13 percentage points since 2007) and Social Security reductions (19%) as their top three. They also agree that their expected retirement age will increase by one year—with husbands now planning to retire at age 64 and wives at 63, and less than half (49%) of couples expect a comfortable lifestyle in retirement.

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The study found that less than half of couples make decisions jointly regarding the day-to-day financial decisions of the household such as budgeting and bill payment (45%) and only 15% of couples in the study feel confident that both of them could assume responsibility for their joint finances if necessary.

Nearly 10% fewer couples than in the 2007 study report they had completed critical plans—a retirement plan, an estate plan, or a will.

Confusion over Investment Products

Fidelity Investments’ second Couples Retirement Study revealed that ownership of retirement investment products continues to be at high levels, but there is still confusion among couples regarding what they own and how these products work. Thirty-nine percent of couples don’t agree on whether they own an annuity, and less than one-quarter of couples know the actual amount of money their annuity will generate for them in retirement. Forty-four percent of couples don’t agree about whether they will need to sell real estate to help fund their retirement.

Although eighty percent of couples agree that at least one of them has life insurance, when asked if they understood the insurance coverage rule of thumb (7 times annual income), more than nine out of 10 couples (95%) did not, and upon learning of it, nearly half (49%) agree they do not have enough coverage based on this rule.

Fifty-nine percent of couples agree they own an IRA, though 26% don’t agree. In more than one-in-ten couples (11%), one of the spouses does not know when they can begin withdrawing funds from their own IRA.

When couples were asked whether their risk tolerance had changed as a result of the recent volatility, 41% of husbands and 54% of wives indicated they have a lower risk tolerance for their investments. However, 73% of husbands and 64% of wives indicated their gut reaction during the crisis was to “stay the course,” while 15% of husbands and 18% of wives reported a sense of “panic” and wanting to “pull out of the market”.

Fidelity conducted the research with just over 500 married couples, comprising Baby Boomers and older pre-retirees, born between the years of 1937 and 1964.

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