Long-term bonds and preferred stocks
with short-term yields

Interest rates are reset periodically

• Usually every 7, 28, 35, or 49 days
• So that yield is typically priced by reference to
  shorter-duration fixed income securities
• Even though auction-rate securities (ARS) typically have 20 or 30 year maturities

Reset by a modified Dutch auction process

• Investors can sell or buy the securities
  on those auction dates

SEC enforcement action against 15 broker-dealers

• Over market trading practices for auction-rate securities
• SEC press release 5.31.06
• C&D order

• Wachtell Lipton commentary  6.27.06

Accounting treatment for investors

• Many corporate investors in ARS have carried them as cash equivalents
• Accounting firms are now advising corporate clients to carry ARS as an investment

• PWC White Paper 2005

• Several public companies have announced a reclassification of ARS on their balance sheets
• Can affect an investor's financial ratios (e.g. current ratio)
• SEC FAQ
• CFO article 4.25.05

Precedent reclassifications

SEC_CODE_REF_0090001192884

ConEdison / NYSERDA 

Consolidation Loan Funding LLC

Balance Sheet (Accounting Issues)