Two securities firms – Citigroup Global Markets and Banc of America Securities¬ will pay nearly $1.3 million to Virginia regulators to settle allegations that they misled investors about the safety of the auction-rate securities market.

During an investigation involving 12 states, regulators discovered that various securities dealers failed to adequately inform customers and train employees on the risks associated with buying auction-rate securities.

When the auctions for these instruments collapsed in February 2008, there was no longer any demand for the investments despite promises that they were “just as good as cash” and “just as safe as a money market investment,” authorities said.

The Virginia State Corporation Commission’s (SCC) settlement is part of a global resolution of the case involving Citigroup Global Markets and Banc of America Securities.

Citigroup Global Markets Inc. is paying $924,781.20 and Banc of America Securities LLC & Banc of America Investment Services Inc. is paying $351,693.67 to settle the case in Virginia.

The SCC’s Division of Securities and Retail Franchising became involved in the multi-state investigation, starting in April 2008 and led by the North American Securities Administrators Association, after it and other states began receiving complaints from investors holding these investment vehicles.

Under the terms of the settlement, the brokerage firms are required to complete or confirm that they have repurchased auction-rate securities from their clients. Although marketed and sold to investors as safe, liquid and cash-like investments, auction-rate securities were actually long-term investments subject to a complex auction process that failed in early 2008, leading to illiquidity and lower interest rates for investors, according to an SCC statement.