UBS to Settle Auction-Rate Probe (Update 2)

Updated from 12:48 p.m. EDT.

UBS(UBS Quote) on Friday said it had agreed in principle to a $18.6 billion settlement with state and federal regulators in the widespread auction-rate securities probe.

The agreement, brokered by the Securities and Exchange Commission, state regulators in New York and Massachusetts and the North American Securities Administrators Association, will require the Swiss bank to buy back the $8.3 billion worth of the securities from investors who bought them prior to the market's collapse in February, over a two-year period beginning Jan. 1, 2009. Beginning June 2010, it will be required to buy up to $10.3 billion from institutional clients.

The firm also will pay separate, $75 million fines to New York state and the Commonwealth of Massachusetts. Authorities allege that UBS and several other banks pushed the securities on unsuspecting clients, saying they were as safe as cash.

"Since the breakdown in the market, UBS clients have been offered multiple liquidity options," said Marten Hoekstra, head of UBS Wealth Management Americas. "They have been able to borrow 100% against the value of their holdings. The solutions announced today provide our clients with the widest range of choices in the industry, including a two-year window during which clients can either continue to earn interest or redeem their ARS at any time."

The settlement comes the day after the first major settlement between banks and regulators on behalf of retail investors in auction rate securities.

New York Attorney General Andrew Cuomo and SEC officials on Thursday announced a $7.3 billion settlement with Citigroup(C Quote). Merrill Lynch(MER Quote) responded later in the day by announcing it would buy back some $12 billion in auction-rate securities currently held by retail clients.

Auction-rate securities are long-term debt instruments whose interest rates change at regular intervals. The investments became illiquid in February, after the auctions collapsed.

Merrill and UBS earlier this year entered settlements with Massachusetts Attorney General Martha Coakley over what the commonwealth deemed inappropriate sales of the securities to certain municipalities. Morgan Stanley(MS Quote) entered a similar agreement on Thursday.

On Friday, Bank of New York Mellon(BK Quote) said in a quarterly filing that the SEC is investigating auction-rate securities transactions in its predecessor firm, Mellon Financial. Bank of New York acquired Mellon last year.