Auction Rate Securities

Auction rate securities (ARS) are debt or preferred equity securities that have interest rates that are periodically re-set through auctions, typically every 7, 14, 28, or 35 days.  ARS are generally structured as bonds with long-term maturities (20 to 30 years) or preferred shares (issued by closed-end funds).  Municipalities and public authorities, student loan providers and other institutional borrowers first began using ARS to raise funds in the 1980s.  ARS were marketed to retail investors who were seeking a “cash-equivalent” investment that paid a higher yield than money market mutual funds or certificates of deposit, although ARS did not have the same level of liquidity as those other instruments.

Following the turmoil in the financial markets that emerged in 2007,  interest-rate auctions for ARS began to fail when the auctions attracted too few bidders to establish a clearing rate.  These dislocations resulted in high or “penalty” interest rates on those securities and/or an inability of investors to sell their ARS until there was a successful auction.  The ARS market collapsed in February 2008 when lead underwriters chose not to step in to support the auctions.  For investors, this meant that they were left with illiquid investments with long-term maturities.  For more information on what happens when auctions fail, please read the FINRA Alert.

Since the collapse of the ARS market, the SEC, FINRA, and state attorneys general have reached settlements with major broker-dealers and other entities.  These settlements included agreements to buy back ARS from certain investors.  For information on the SEC actions and other information concerning ARS, see the SEC’s Auction Rate Securities webpage.  In addition, many issuers of ARS have redeemed their ARS and converted to other types of securities.

Information regarding the current interest rates for municipal ARS and certain related information, such as the maximum and minimum permitted rates, interest rate period, maturity date, and bid-to-cover ratio, is now publicly available at no charge on EMMA at