Regulators looking into the auction-rate securities debacle have turned their attention to nearly 40 brokerages that might have sold the paper to clients but didn’t underwrite it.
Investigators from the Financial Industry Regulatory Authority plan to conduct on-site examinations at the brokerages, with the first inspections beginning Monday, to determine whether the companies were aware of the problems in the auction-rate market and adequately warned customers about the risks.
The regulatory sweep represents a major widening of auction-rate probes that until now have centered on the big investment banks that underwrote the debt and managed auctions of the securities.
On Thursday, three more Wall Street firms agreed to make amends with customers who bought auction-rate securities.
The addition of Merrill Lynch & Co., Goldman Sachs Group Inc. and Deutsche Bank brought to eight the number of companies that have reached legal settlements regarding the securities. The eight companies have agreed to repurchase about $50 billion of roughly $60 billion in auction-rate debt estimated to be held by individual investors.
Auction-rate securities are long-term debt instruments that were designed to trade like short-term securities. In early 2008, when the credit crunch worsened, the $300 billion auction-rate market froze, leaving investors unable to sell their holdings.