Investor Protection Guide: Auction Rate Securities
Auction rate securities (ARS) are long-term debt instruments or preferred securities whose interest or dividend rates are periodically reset through auctions, typically held at regular intervals such as every 7, 28, or 35 days. Although ARS often have long-term maturities or no maturity date, they were marketed as highly liquid investments because investors could sell the securities through the auction process.
The liquidity of ARS depended on the continued functioning of the auction market. During the 2008 financial crisis, many auctions failed, preventing investors from selling their securities and exposing the liquidity risks associated with ARS. Following the collapse of the auction market in 2008, auction rate securities largely ceased functioning as liquid investment instruments. Numerous regulatory investigations and lawsuits alleged that financial institutions misinterpreted the risks and liquidity of these investments.
See, e.g.; Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98 (2012) and In re Merrill Lynch Auction Rate Securities Litigation, 704 F.Supp.2d 378 (2010).
[Last reviewed in May of 2026 by the Wex Definitions Team]
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