Citigroup Inc. has reached a deal with U.S. regulators to give the purchasers of auction rate securities their money back.

The U.S. Securities and Exchange Commission’s Division of Enforcement today announced a preliminary settlement in principle with Citigroup Global Markets, Inc., including proposed charges and a plan that would give individual investors, small businesses, and charities all US$7.5 billion of their money back from auction rate securities they purchased from the firm. The agreement also would require Citi to use its best efforts to liquidate by the end of 2009 all of the approximately US$12 billion worth of ARS the firm sold to retirement plans and other institutional investors.

The terms of the agreement in principle, include: Citi being permanently enjoined from violating the securities laws; the firm will liquidate at par all ARS from its retail customers within three months; Citi will make whole any losses sustained by customers who purchased ARS before Feb. 12, and sold these securities at a loss; it will use its best efforts to liquidate ARS from its institutional customers by the end of 2009; until it actually liquidates the securities, Citi will provide no-cost loans to customers that will remain outstanding until the ARS are repurchased; and, customers with consequential damages beyond the loss of liquidity can participate in a special arbitration process.

Linda Chatman Thomsen, director of the SEC’s Division of Enforcement, said, “Today’s agreement in principle provides real relief to investors. In a short period of time, about 38,000 individual, small business, and charitable organization investor accounts will receive nearly US$7.5 billion in liquidity, and Citi will begin the process of restoring liquidity to over 2,600 institutional investors who hold approximately US$12 billion in auction rate securities. This settlement in principle is an outstanding example of federal and state regulatory cooperation for the benefit of investors and markets.”

The Financial Industry Regulatory Authority has established a special process for resolving ARS-based claims, as a result of the one developed for the settlement between Citigroup and the SEC. “In light of the settlement with Citigroup, FINRA believes it is a matter of fairness that all investors with auction rate securities claims, regardless of the firm involved in the dispute, be handled in this manner,” said Linda Fienberg, president of FINRA Dispute Resolution.

“Since the beginning of the Auction Rate Securities crisis, Citi has worked diligently with issuers, investors, and regulatory authorities to obtain liquidity for holders of illiquid ARS. We have made tremendous progress on these efforts, and, in fact, more than fifty percent of our retail clients’ holdings in ARS have been redeemed or auctioned at par since the crisis began,” the firm said.

“We are pleased to reach this agreement in principle with the New York Attorney General, the Securities and Exchange Commission, and other state regulatory agencies. We remain committed to continuing our work on initiatives that will secure the best and fastest route to providing liquidity to our clients,” it added.