Firms Face SEC’s Auction-Rate Probe

UBS, Citigroup Inc., Merrill Lynch & Co. and Wachovia Corp. face a Securities and Exchange Commission probe of their auction-rate bond operations, the firms said in a regulatory filing.

The four companies are managing $435 million of auction-rate shares being offered by Eaton Vance Floating-Rate Income Trust, a fund run by Boston-based Eaton Vance Corp. In the offering’s prospectus, filed Tuesday with the SEC, the UBS-led group said the agency has asked them to detail their “practices and procedures in auction-rate securities markets.”

The SEC is investigating whether brokers in the $204-billion auction-rate market improperly tipped favored customers to other investors’ bids in auctions that set yields for the securities. Investors aren’t supposed to see rival bids. UBS, Citigroup and Wachovia declined to comment, and Merrill Lynch didn’t return a call.

Auction-rate investors buy a long-term security such as a 30-year bond, and bid through brokers to set the interest rate as frequently as weekly or monthly. The interest rate resets in a so-called Dutch auction, in which the lowest-priced bid that sellers will accept becomes the level at which the entire offering is sold. Such auctions are susceptible to manipulation if some participants see others’ bids or if brokers and bidders enter into undisclosed arrangements.