Auction Rate Securities: Do you have any in your investment portfolio?

Auction rate securities (ARS) are often similar to bonds in that they can have a maturity date well into the future. They may be classified in your investment portfolio under cash equivalents or fixed income, and may be listed as ARS, AUC, a type of student loan or some other description. They are often treated as cash equivalents by the investor because they are sold through auctions every 7, 14, 28 or 35 days, thus making them very liquid.

However, earlier this year, liquidity issues in the global credit markets resulted in the failure of ARS auctions.

This loss of liquidity does not mean that the investment is worthless; however, the investor may be forced to wait until the security matures, which could be 20 to 30 years, before the investments can be liquidated. Therefore, these investments are no longer considered cash equivalents and will be reclassified as long-term investments for financial statement purposes. More importantly, investors need to realize that funds that they once thought were easily convertible to cash may be unavailable for the long-term. 

All may not be lost!

Recent developments with these securities are showing that some brokerage firms are offering to redeem the ARS. We suggest that you contact your investment advisor to determine if your portfolio contains any of these securities and to determine the course of action, if any, you should consider.