Aug. 21 (Bloomberg) -- Merrill Lynch & Co. agreed to buy back all the auction-rate securities it sold to individuals in the U.S. to settle regulatory claims the bank misled investors about the debt's safety.

Merrill will start redeeming the securities in October, Massachusetts Secretary of State William Galvin, who sued the firm on July 31, said today. The New York-based bank is negotiating with federal and state regulators about fines, he said. It previously offered to buy back $10 billion of the debt.

``We have an agreement in principle,'' Galvin said in an interview. ``Merrill customers are anxious to get this resolved.''

Merrill would be the sixth bank this month to settle claims stemming from a nationwide investigation into regulatory claims that banks peddled auction-rate securities as investments that were as liquid as cash. The $330 billion market seized up in February, when the credit crisis prompted Wall Street firms to stop supporting the periodic auctions in which the securities were bought and sold.

The bank will begin the buyback on Oct. 15 for individuals, nonprofits and small business with $3 million or less on deposit, Galvin's office said. Redemptions for clients with $100 million or less start on Jan. 15. Alex Detrick, a spokesman for New York Attorney General Andrew Cuomo, who has been involved in many of the bank settlements, declined to comment, as did Securities and Exchange Commission spokesman John Nester.

$12 Billion Holdings

Merrill said on Aug. 7, when it announced the voluntary buyback, that it had 30,000 clients who held an estimated $12 billion in auction-rate securities. Mark Herr, a spokesman for the bank, declined to comment on Galvin's announcement.

UBS AG, Citigroup Inc. and three other Wall Street banks have agreed to repurchase almost $35 billion of auction-rate debt from individuals, charities and small businesses, accounting for about 17 percent of the estimated $200 billion left in the market. Joined by Morgan Stanley, JPMorgan Chase & Co. and Wachovia Corp., the banks have agreed to pay $360 million in fines.

Bank of America Corp. and Deutsche Bank AG are among the remaining major banks that haven't yet reached settlements. Regional brokerages such as Charles Schwab Corp., Fidelity Investments and E*Trade Financial Corp. are also being targeted for their role as middlemen in selling debt created by the banks to clients.

U.S. regulators will start on-site inspections next week of about 40 brokerages involved in sales of auction-rate debt, stepping up a nationwide inquiry into whether the firms failed to warn clients the market was collapsing, a person familiar with the matter said yesterday.

Spreadsheets Sought

The Financial Industry Regulatory Authority wrote to the firms this month seeking spreadsheets on bids submitted for the products, copies of training and marketing materials and risk analyses and the results of internal investigations, the person said. It would also like to know whether phone lines on auction- rate trading desks were recorded.

The auction-rate market's collapse surprised thousands of investors, who found their money stuck in securities they couldn't sell. Regulators say banks and brokerages misled investors by selling auction-rate securities as alternatives to cash even as the market veered toward collapse.

To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net.

Last Updated: August 21, 2008 14:26 EDT