Sunday, September 27, 2009

Fidelity Brokerage & Online Bond Trading/ Bank of America's Agreement with U.S.-Parity of Government's Preferred With Publicly Traded Preferred Shares

1. Bank of America Preferred Stock-Parity with Government's Preferred Stock: I did find a document that clearly states that only the common stock of Bank of America and any other BAC security that expressly states it is junior to the government's preferred are junior securities to the government's preferred shares. This SEC filing references the government's Series R Preferred Stock:

"Junior Stock" means the Common Stock and any other class or series of stock of the Registrant the terms of which expressly provide that it ranks junior to the Series R Preferred Stock as to dividend rights and/or rights on liquidation, dissolution or winding up of the Registrant. "Parity Stock" means any class or series of stock of the Registrant the terms of which do not expressly provide that such class or series will rank senior or junior to the Series R Preferred Stock as to dividend rights and/or rights on liquidation, dissolution or winding up of the Registrant (in each case without regard to whether dividends accrue cumulatively or non-cumulatively)."Form 8-K

(See also Part 3 (c) (xiv) where Parity stock is defined to specifically include the "Floating Rate Non-Cumulative Preferred Stock, Series 2" Certificate of Designations for the Series R Preferred Stock)

The publicly traded preferred stock issued prior to the government's preferred shares would not provide "expressly" that they rank junior to the government's preferred and would therefore be "parity" stock. Generally, and I have not yet seen an exception in a prospectus to what I am about to say, a company can not pay a distribution on one parity security and refuse to pay on other parity securities. If a company pays on one Parity security, it has to pay on all of them. This is a typical provision, which is contained in one of BAC's prospectuses for its preferred stock, BACPRE:

"Except as provided below, for so long as any share of Preferred Stock remains outstanding, we will not declare, pay, or set aside for payment, dividends on any parity stock unless we have paid in full, or set aside payment in full, all dividends for the then-current dividend period for outstanding shares of Preferred Stock. To the extent that we declare dividends on the Preferred Stock and on any parity stock but cannot make full payment of those declared dividends, we will allocate the dividend payments on a pro rata basis among the holders of shares of Preferred Stock and the holders of any parity stock. For purposes of calculating the pro rata allocation of partial dividend payments, we will allocate dividend payments based on the ratio between the then-current dividend payments due on shares of Preferred Stock and the aggregate of the current and accrued dividends due on any parity stock." (PAGE S-5: Bank of America Corporation)

Similar type provisions can be found in the general prospectus for Merrill Lynch preferred stocks at pages S-27 to S-28: General Prospectus Supplement

It is possible to have different terms with securities deemed to be in parity with one another. An obvious example would be Junior Bonds with different maturity dates, or a difference in equity preferred issues on whether the distribution is cumulative or non-cumulative. But those differences do not change the fundamental principles, that parity stocks have to be paid together or not paid together.

2. Fidelity Renders it Next to Impossible to Trade Bonds Online: About two weeks ago, Fidelity started unreasonable requirements that have effectively prevented me from even entering an order online to sell bonds. Last Friday, I made about my tenth attempt to sell a bond since these strictures were put in place, and the system would not even allow me to enter an order to sell what I already owned, even at a price below where the market was then trading or below the third party price which was then well below the market price. If anyone uses a broker that is more friendly toward individuals trying to manage their portfolio, please leave a comment or send me an email. Has anyone had any experience trading bonds with Zions Direct?

I would say that over half of my bond trading has been buying and selling in the bond market, with the remainder being trading exchange traded bonds. Exchange Traded Bonds: I will need to find a new broker for bond trading.

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