Auction Rate Securities

Overview of Auction Rate Securities

There are two varieties of auction rate securities (ARS): long-term bonds that earn variable, short-term coupon payments, and perpetual preferred stock that pays variable, short-term dividends. ARS rates are determined through a periodic auction process. Municipal entities may issue tax-exempt or taxable auction rate bonds for municipal purposes. Auction rate preferreds are typically issued by corporations and may offer specific tax benefits to corporate purchasers. Auction rate preferred shares are primarily issued by investment management companies which may issue either tax-exempt or taxable ARS depending on the unique characteristics of the investments made by the investment company.¹

ARS help issuers diversify their funding structure because they pay at variable, short-term rates while traditional bond issues pay a fixed, long-term rate. ARS rates are typically reset every seven, 28, 35 days or longer depending on the issue. While municipalities or corporations issuing ARS may use the proceeds to fund specific projects or for general purposes, investment companies use the proceeds from the sale of ARS to invest in other securities to be held by a closed-end mutual fund, as described in the fund's prospectus. As long as the closed-end fund’s rates of return on the investments purchased with the proceeds from the sale of ARS exceed the rates the fund pays on the ARS, the fund earns the difference, or "yield spread" between the two rates. The yield spread may be passed on by the investment company to its shareholders in the form of higher dividends.

For a detailed discussion of the features and risks of ARS, investors should review available ARS disclosures.

Our Practices and Procedures for Auction Rate Securities

Please review available ARS disclosures for a discussion of Wachovia Securities auction practices.

Understanding the typical terms and descriptions of the auction practices we use is crucial when you invest in ARS through Wachovia Securities, but because each security is different, investors should review the disclosures of the auction agent and other broker-dealers participating in the auction for a specific ARS in which they wish to invest. Printed copies of offering documents, Wachovia Securities ARS disclosures and those of other auction participants, and other general educational information concerning ARS can be obtained from a Wachovia Securities Financial Advisor.

The market for ARS has recently experienced turmoil. If you own ARS, they continue to be priced at par with limited exceptions, which, in the absence of publicly available pricing information, are estimated by the firm using available information and its judgment. Based on market conditions, these securities may be valued more or less than par. These prices are not necessarily a reflection of the amount that may be realized upon sale of the securities. In the event an investor sells an ARS between auction dates, there is no guarantee that they will receive the full principal or par amount of their investment upon sale outside of auction.

¹ Income from tax-exempt ARS is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT). Wachovia Securities is not a tax or legal advisor.

09/08, 0708-94075

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