Mass. regulator subpoenas UBS, Merrill, BofA

BOSTON (Reuters) - Massachusetts' top securities regulator said on Friday that his office was demanding information from three large investment houses as he deepens a probe into the $330 billion auction-rate securities market.

William Galvin, the state's secretary of the Commonwealth, issued subpoenas to UBS Securities <UBSN.VX>, Merrill Lynch <MER.N> and Bank of America Investment Services <BAC.N> to determine whether they told investors about the potential risks of these investments, whose market sank in February.

"The recent freezing of the auction markets coincided with the decision by a number of major brokers to stop supporting the auction market and appears to be yet another after-effect of the subprime lending excesses and the subprime market meltdown," Galvin said in a statement.

Auction-rate securities are long-term bonds that behave like short-term debt and have long been popular with conservative investors because of their tax-exempt status.

Galvin, who has won big settlements from brokers and fund managers, began looking into the auction-rate securities market when it became the latest victim of the credit market crunch.

At that time, he asked nine prominent investment managers, including Boston-based Eaton Vance <EV.N> and MFS Investment Management, for help in assessing how their clients reacted as liquidity dried up.

Galvin's office is now investigating whether auction-rate securities are appropriate for investors.

Municipalities often issue the securities, whose interest rates reset frequently. Starting in February, the auctions failed to find much interest.

Officials at Bank of America and UBS declined to comment, while a Merrill Lynch spokesman was not immediately available.

(Reporting by Svea Herbst-Bayliss; Editing by Lisa Von Ahn)