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Univ. of Toledo College of Law

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Friday, August 22, 2008

SEC Enters Preliminary Settlement with Merrill Lynch over ARSs

Today the SEC's Division of Enforcement today announced that a preliminary settlement in principle has been reached with Merrill Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch) about auction rate securities (ARSs), a day after New York, Massachusetts and NASAA announced settlements.  The settlement would enable investors who purchased auction rate securities from the firm to receive a total of up to $7 billion to restore their losses and liquidity.  In addition to helping individual investors, small businesses, and charities who were ARS customers of Merrill Lynch, the preliminary settlement also would require Merrill Lynch to use its best efforts to provide liquidity for approximately $1.5 billion worth of ARS purchased through Merrill Lynch by other business and institutional customers. The terms of the settlement are subject to finalization, review and approval by the Commission.

Under the terms of the agreement in principle:

No later than Oct. 1, 2008, Merrill Lynch will offer to liquidate at par all ARS from individual, charitable, and small business investors with account values up to $4 million who purchased ARS from Merrill Lynch prior to the collapse of the ARS market in mid-February 2008. This offer will include investors who held ARS in their Merrill Lynch account as of Feb. 13, 2008, but who subsequently transferred the account to another firm. The offer will remain open until Jan. 15, 2010, and investors may accept it at any time before that date.

No later than Jan. 2, 2009, Merrill Lynch will offer to liquidate at par all ARS from remaining individual and charitable investors, and from small businesses with account values up to $100 million who purchased ARS from Merrill Lynch prior to the collapse of the ARS market in mid-February 2008. This offer will include investors who held ARS in their Merrill Lynch account as of Feb. 13, 2008, but who subsequently transferred the account to another firm. The offer will remain open until Jan. 15, 2010, and investors may accept it at any time before that date.

Until Merrill Lynch actually provides for the buy back of ARS on the schedule set forth above, Merrill Lynch will provide certain investors no cost loans that will remain outstanding until the ARS are repurchased or until an investor declines Merrill Lynch's offer to repurchase the securities at par.

Merrill Lynch will reimburse customers for costs incurred under any prior loan programs the firm provided to its ARS investors.

Merrill Lynch will make whole any losses sustained by any of the investors described above who sold ARS after Feb. 13, 2008, at a loss.

To the extent that any of the investors described above has incurred consequential damages due to the loss of liquidity in the customer's ARS holdings, Merrill Lynch will participate in a special arbitration process that the investor may elect, and that will be overseen by the Financial Industry Regulatory Authority (FINRA), whereby Merrill Lynch will not contest liability for its misrepresentations and omissions concerning ARS.

Merrill Lynch will use its best efforts to provide liquidity to its ARS institutional customers and business customers with accounts of more than $100 million by the end of 2009.

Merrill Lynch will not liquidate its own inventory of a particular ARS before it liquidates investors' holdings in that security.

Merrill Lynch will provide notice to all of its ARS investors of the settlement terms and will establish a telephone assistance line to respond to questions from investors concerning the settlement.

Merrill Lynch will be permanently enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act of 1934, and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.

Merrill Lynch faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. A determination as to the amount of the penalty, if any, will take into account, among other things, the extent of Merrill Lynch's misconduct in marketing and selling ARS, an assessment of whether Merrill Lynch has satisfactorily completed its obligations under the settlement, and the costs incurred by Merrill Lynch in meeting those obligations, including penalties incurred and the cost of remediation.

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