WASHINGTON - Fidelity Investments and Charles Schwab & Co. are suggesting state and federal securities regulators focus their auction-rate securities investigations on the major banks and broker-dealers that underwrote ARS rather than smaller brokerages that had no advance knowledge that the ARS market was going to collapse.
Reacting to requests from state regulators that they buy back at par the now-illiquid ARS their brokerage units sold to retail customers as safe securities, representatives of both Fidelity and Charles Schwab stressed yesterday that their companies did not underwrite the ARS products and said they did not mislead customers about ARS.
"With respect to auction-rate securities, Fidelity is neither the issuer, underwriter, or the sponsor of these securities," said Vincent Loporchio, a spokesman for Fidelity Investments. "Unlike some other firms, Fidelity does not proactively market auction-rate securities nor does it maintain an inventory of these securities."
He added that the firm has included information about the possibility of failed auctions of ARS on its Web site since 2006, when it began offering the securities, and that only a small number of Fidelity retail customers own ARS.
Greg Gable, senior vice president at Schwab, emphasized that the firm had no role in the auction process and only distributed them at the request of its customers.
"It's important to know that unlike other firms that have been in the news related to auction-rate securities, we didn't underwrite these products, didn't market them to our clients, but simply acted as an agent as an accommodation when clients asked for them," Gable said. "A significant portion were simply transferred in from other firms where they were purchased."
He added that multiple regulators have asked the firm to provide ARS information and it is cooperating with the requests.
The firms appear to echo similar arguments made this week by the Regional Bond Dealers Association, which wrote letters to state and federal regulators Monday that pointed out that the five ARS settlements reached recently are faulty because they exclude investors who purchased the securities through secondary regional firms that merely distributed the ARS and had no control over the auctions.
The RBDA and its members have become increasingly concerned that the settlements don't include the roughly $60 billion of outstanding ARS purchased through smaller firms because the regulators still plan to bring legal action against them. The RBDA said the firms that the big firms that underwrote and sold the ARS should be responsible for providing relief to the investors who purchased the securities through the smaller firms that merely distributed them.
The next day, Massachusetts Secretary of the Commonwealth William Galvin urged Fidelity to buy back now-illiquid ARS its brokerage unit sold to retail customers as safe securities, mirroring the buy-back plans that five large firms have agreed to in recent weeks.
"It is my hope that Fidelity will follow the industry trend and promptly repurchase these securities that it has sold to its customers, many of whom now find themselves unable to access money that they thought was as liquid as cash," Galvin wrote in the one-page letter, which was sent to Edward Johnson III of Fidelity Management & Research Co., and to Fidelity Brokerage Services LLC, which are subsidiaries of Fidelity Investments.