Pricing for Auction Rate Securities (ARS)

Since early 2008, when ARS auctions began experiencing widespread failures, the market for auction rate securities has been largely illiquid, preventing holders from selling ARS as they may have anticipated.

As most ARS auctions continue to fail, it is important to understand how this continuing illiquidity affects statement pricing and how that pricing, in turn, may affect owners. Currently, only two significant sources of liquidity for auction rate securities have emerged:

• Settlements with regulatory agencies have prompted certain banks and brokerages to purchase the positions of eligible investors.
• At their discretion, ARS issuers have redeemed or called positions.

Pricing Practices

ARS holders should also understand Raymond James’ practices with regard to pricing these securities on account statements. In addition, clients should be aware that changes may occur in these practices and that such changes may affect the pricing of their holdings.

In the past and continuing today, securities firms including Raymond James typically obtain prices of securities reflected on client statements (including ARS) from unaffiliated third-party pricing services when such information is available. Raymond James did not and does not control the accuracy or completeness of this pricing information.

Because the current lack of liquidity in the market for ARS may make it more difficult for pricing services to price ARS, these pricing services may discontinue providing pricing information for ARS at any time. As a result, Raymond James, at its discretion, may change how it prices, or stop pricing altogether, any or all ARS held in client accounts without prior notice. Potential changes may include, without limitation, discontinuing or replacing the pricing services used, reporting a price of zero, or not reporting a price – indicated on client statements as “not available” (N/A) – when acceptable pricing information from a third-party service is not available.

Impact on ARS Holders

Prices reflected on statements should not be considered the prices that would be obtained should the ARS be sold. In the event a holder can sell an ARS position outside of the auction process, no assurance can be made that the seller will receive either the full principal or the statement price of the ARS.

If ARS currently priced at par are priced below par in the future on an account statement, owners may experience material impacts.

• If the ARS decrease in value, the asset allocations and performance reporting of the client’s portfolio may change. In such situations, Raymond James recommends clients consult with their financial advisors to assess the performance of their other securities to obtain a more representative view of their account’s overall performance.

The typical terms and descriptions of the auction practices are crucial to understanding an investment in ARS. Because each ARS is different, investors should review the firm’s disclosures, the disclosures of the auction agent and other broker/dealers participating in the auctions for a specific ARS.