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).

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.”

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“).