TD Ameritrade's ARS settlement excludes RIAs

TD Ameritrade Holding Corp.'s agreement with regulators last week to buy back $456 million of auction rate securities from individual investors, charities and small- business clients leaves registered investment advisers out in the cold.
The pact with the Securities and Exchange Commission and state regulators in New York and Pennsylvania doesn't extend to clients who bought the securities through independent RIAs or who transferred auction rate securities to TD Ameritrade for custody after buying them from another firm.

That is be-cause regulators focused on sales practice violations committed directly by TD Ameritrade brokers, who marketed the securities as liquid alternatives to money markets funds, with slightly higher yields, according to regulators.

“At the end of the day, our view— and all the federal and state regulators agreed with us — was that it applies to the retail clients only, be-cause there was no intermediary between us and them,” said Fred Tomczyk, president and chief executive of the Omaha, Neb.-based firm. “The regulators realize that the independent RIAs were themselves acting as fiduciaries, and we were acting as custodians.”

TD Ameritrade's settlement is being closely monitored because it could be a precedent for future settlements as regulators press auction rate cases against other brokers, including some RIA custodians, whose clients are stuck with the flawed securities. When Boston-based Fidelity Investments last year agreed to repurchase some ARS, it similarly excluded clients of RIAs from the offer.

Mr. Tomczyk conceded that the distinction might irritate RIAs who keep their customers' assets with TD Ameritrade and who conduct much of their trading through the firm. The advisers may be especially irked because the firm has been pushing hard in recent years to develop its institutional arm for RIAs as part of its plan to diversify from a largely commission-based revenue model.

Advisers who purchased ARS for clients are in some ways in the same boat as TD Ameritrade and other “downstream” brokers who initially argued that they were so far removed from the underwriting of the securities and the operations of the auctions that they weren't responsible for failing to anticipate the market's collapse.

That collapse left investors stuck with more than $300 billion of the long-term debt, which was sold with promises that it could be redeemed at weekly or, approximately, monthly intervals.

“We totally understand those points, and in our hearts we agree with them,” Mr. Tomczyk said of aggrieved advisers. “But as an organization you have to stand back and do what's right for the organization.”


Source