Four Alternatives to Failed ARS Auctions

What happens when an issuer redeems ARS?

To address failed auctions, some issuers of ARS, including certain closed-end funds, have started to redeem shares, generally at par value. In many cases, the issuers are calling the entire issue for redemption. In other cases, the issuers are offering to redeem only some of the outstanding shares.

In the case of such partial redemptions, not every share will be redeemed. The process begins when an issuer notifies the Depository Trust Company (DTC) that it will call for redemption part of the outstanding shares. DTC is a company that serves as the repository for several million securities issues. DTC also handles book-entry changes for securities registered in "street name" at brokerage firms. For partial redemptions, DTC allocates redemptions among broker-dealers for which it is holding shares using an impartial system. The broker-dealers receiving allocations then identify how those redemptions are to be allocated among their customers.

Investors need to be aware that in a partial redemption, it is possible that a broker-dealer holding ARS shares may not be allocated redemptions in the DTC allocation process. If you are a customer of a brokerage firm that does not get an allocation, you will not be able to participate in the partial redemption.

You should also be aware that, in the case of a partial redemption, a brokerage firm that receives an allocation might not be able to redeem all the shares of all its customers. FINRA Rules require broker-dealers to adopt procedures to allocate redemptions in the case of partial redemptions that reasonably allocate the shares they receive among customers on a fair and impartial basis.

Where to Turn for Help

Ask your broker whether any ARS you hold are eligible for redemption. If so, and if the redemption is partial, your brokerage firm should be able to tell you what procedures it is following to allocate shares among its customers. If you have a problem related to ARS that your firm did not resolve to your satisfaction, you can file a complaint online at FINRA's Investor Complaint Center.

To obtain a copy of the offering documents, contact the broker through whom you purchased your ARS investment. Or, for a municipal bond offering, you may request a copy of the official statement from the Municipal Securities Rulemaking Board's Municipal Securities Information Library at [phone] -- and, for a closed-end fund, you can download the fund's prospectus from the issuer's Web site.