Auction Rates Upset Bank-Broker Clients

NEW YORK (Dow Jones)–Paul Zuccarini walked into his local Bank of America Corp. (BAC) branch in Sewall’s Point, Fla., looking for a certificate of deposit to buy for a retirement account.

He walked out with nearly half of his nest egg in auction-rate securities, and assurances that he’d have quick access to his funds should he need them.

Now, because the auctions that set the interest rates on his securities have failed, Zuccarini, a 66-year-old retiree, can’t touch that money.

Since 1999, when Congress repealed the Glass-Steagall Act – which separated banking and brokerage operations – more firms have been trying to squeeze the most from the relationships between their business lines. Many banks now station stockbrokers in their branches, hoping to catch some crossover customers. They’re also allowing brokers to call bank clients directly to offer them brokerage products. But regulators and investors’ advocates have raised concerns about the setup being confusing to customers, who may not realize that brokerage products are different from – and not as protected as – bank products.

With reports of investors buying auction-rate securities in bank branches, and now being stuck without immediate access to their money, concerns about bank branches that house brokers could escalate.

“This situation is the perfect example of what the problem is with having that mix,” said Stuart Meissner, an investors’ attorney in New York who said he’s heard from around 10 people who bought auction-rate securities either after they were steered to brokerage desks in bank branches or received cold calls from brokers affiliated with their banks.

“Those people are shocked as to what happened,” he said.

A Bank of America spokesman said the company follows regulations governing the sale of non-deposit investment products in banks. He said the firm is committed to “best serving our clients.”

Auction-rate securities are bonds issued by cities, student-loan agencies and closed-end funds that have interest rates reset by auction every seven to 35 days. About $330 billion of auction-rate securities are now held by both institutional and individual investors.

In February, the auctions that reset the rates failed, leaving hundreds – or more – investors with assets tied up in securities they can’t sell.

Scott Silver, an investors’ lawyer in Coral Springs, Fla., said he has a 70-year-old client who went to a Wachovia Corp. (WB) bank branch last summer branch to open a savings account or buy a CD. Instead, Silver said, a broker with Wachovia Securities who was based in the branch sold her $175,000 in auction-rate securities – all of her savings. Silver said the broker pitched them as equivalent to a money-market account. Now the woman can’t access money she needs to pay her taxes, he said.

“To her, (if) she’s sitting in the bank, she’s dealing with the bank,” Silver said. “People don’t appreciate the difference between the bank side and the brokerage side.”

Wachovia Securities spokeswoman Teresa Dougherty said the firm is “working diligently on solutions to this industrywide problem, seeking to return liquidity to our clients as quickly as possible.” She said the firm is offering margin loans to allow clients to regain some liquidity.

When Zuccarini entered the Bank of America branch around August 2007, he said, he had already cashed out of his retirement plans at another firm because he was skittish about having his money tied up in stocks. His goal, he said, was to buy CDs that he could put into an individual retirement account.

When Zuccarini explained to the bank manager that he needed to open an IRA to house the CDs, she directed him to a financial advisor, who quickly drove over from a nearby branch, he recalled.

Zuccarini said the financial advisor told him that a CD wouldn’t give him quick access to his money, and that she could get him better liquidity and a slightly higher interest rate with another product.

In addition to following the appropriate regulations, Bank of America spokesman Matthew Card said, the company evaluates “the investment needs of our clients on an individual basis, guided by their financial goals and risk tolerance.”

Zuccarini said the financial advisor made it clear that the product he was buying wouldn’t be FDIC-insured. But he said she also told him he would have good access to the funds and he would not lose his principal. He said she told him there were no risks involved.

“If she had said anything at all about how it was possible you could lose your principal, I wouldn’t have done it,” Zuccarini said.

Zuccarini said his account statements indicate his principal is still there – unlike UBS AG (UBS), Bank of America has not written down the value of the auction-rate securities in customer accounts.

Bank of America’s Card said the company is, along with the rest of the industry, “evaluating statement pricing in relation to these securities.”

But even if his principal remains intact, the practical effect is that Zuccarini can’t get to his money, which, the last time he checked, was earning less than 5% interest.

Zuccarini doesn’t have an immediate need for the cash, he said. But he had only wanted to keep the money out of the stock market for a short time. He’d planned to reinvest once the market stabilized.

“It’s not like I’m going to starve to death if I don’t get the money,” said Zuccarini, who is currently living off his Social Security checks. But the bank “isn’t living up to their end of the deal, and God knows what’s going to happen to the money.”

See our March 1, 2008 posting relating to Auction Rate Securities Investigation.

See our April 3, 2008 posting relating to Auction Rate Securities: Meissner Firm Criticize FINRA Release

See our April 4, 2008 posting relating to Auction Rate Securities: Filing Complaints with Regulators / Participating in Class Actions