More Regulation is Unavoidable

Next week, U.S. regulators will begin doing on-site inspections of brokerage firms involved in the sale of auction-rate securities. So far, New York Attorney General Andrew Cuomo has settled some high profile settlements with the likes of Citigroup, UBS, JPMorgan Chase, Morgan Stanley and Wachovia. Last night, Cuomo reached a settlement with Merrill Lynch, Goldman Sachs and Deutsche Bank.

The settlements include paying civil penalties for wrongdoing and repurchasing auction-rate securities from retail and institutional clients. The issue, if you are not familiar with the story, is the purchase of auction-rate securities in money-market accounts without the clients proper knowledge of the risks. These auction-rate securities allow municipalities, student loan agencies and closed-end mutual funds to sell long-term debt with lower short-term rates for short-time durations. The problem ballooned when the $330 billion market for these securities collapsed and investors who didn't understand the risks or investments couldn't access what they thought was a safe and liquid money-market account. The question now is whether Wall Street and the banks that sold these securities misguided investors.

I don't know what regulators will find when they begin these inspections next week, but one thing is for sure: There will be more regulation, fewer loopholes and much more stringent rules regarding the fine print attached to the sale of any security in the industry. The latter has to be a good thing for all of us. The question is whether you and I will learn from our mistakes and read the fine print.

This morning Anthony Carfang, a partner at Treasury Strategies, Jacob Zamansky, a securities lawyer with Zamansky & Associates and Chad Bray, a reporter for Dow Jones Newswires, joined me to discuss the importance of these settlements, what you should do if you are one of the people who invested in these products and how the industry will change as a result.

Take a look.