Nov. 18 (Bloomberg) -- Wells Fargo & Co., the fourth- biggest U.S. bank by assets, agreed to repay about $1.3 billion to brokerage clients whose funds were frozen when the auction- rate securities market collapsed last year, the North American Securities Administrators Association said today.

San Francisco-based Wells Fargo agreed to buy back all auction rate securities it sold through its brokerage unit before Feb. 13, 2008, the association said in a statement. The bank also will pay a $1.9 million fine and reimburse investors who sold their holdings at a discount after the market collapsed.

State regulators in Oregon, California, Georgia, Missouri, Texas, Utah and Washington investigated whether Wells Fargo Investments LLC misled clients by falsely assuring them auction- rate bonds were a safe, liquid alternative to cash, certificates of deposit or money market funds, the association said. State regulators led by the group have forced banks to buy back $61 billion in auction-rate securities since the market froze in February 2008.

“Getting $61 billion freed up for investors is nothing less than awesome,” said Texas Securities Commissioner Denise Voigt Crawford, association president, in a phone interview from Austin. “What’s incredible is the enormity of the results.”

Last Settlement

The Wells Fargo deal marks the last of the settlements with large banks that sold auction-rate securities, which are long- term bonds with interest rates that reset every week or month. The market totaled $330 billion before it collapsed when securities dealers stopped supporting auctions that didn’t attract bidders, leading to investors being trapped holding hundreds of billions of dollars of the debt.

The U.S. Securities and Exchange Commission and Financial Industry Regulatory Authority also have investigated sales of auction-rate securities and forced dealers to settle.

Efforts to recover investor funds will continue, with the focus on so-called downstream sellers of the securities, Crawford said. They are firms that didn’t underwrite the securities or manage the auctions, selling them to investors.

Wells Fargo clients held an estimated $2.95 billion in auction-rate securities when the market froze. Bank spokeswoman Kathleen Golden said the company would release a statement later today.

To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net.

Last Updated: November 18, 2009 11:17 EST