Treasury Bills Are Easily Redeemed

Q: You wrote recently about how to purchase Treasury bills. But how does one redeem or sell them? I’m told it’s extremely hard. --P.V.

A: Actually, it can be rather easy to redeem a Treasury bill; you just have to know how to go about it. For starters, anyone who purchases Treasury securities should open a Treasury Direct account. In some cases, these accounts are mandatory; in nearly all cases, they are wise.

If you hold your bill to its scheduled maturity, its proceeds will be deposited to the bank account you designate on your Treasury Direct application form. If you like, the proceeds can be used to purchase new Treasury securities, but you must notify the Federal Reserve Bank of your intentions.

If you want to sell your securities prior to maturity, the process is a bit more involved. The Treasury Department prefers that all such sales be handled through the secondary market--the banks and brokers whose business it is to buy and sell investment securities.

Indeed, if you don’t have a specific buyer or recipient of your security in mind, that is what you must do. Your broker or bank can provide you with the necessary security transfer application form. Complete it. Your securities will then be transferred to the account of the broker or bank you have designated, and you will be paid by that institution according to the security’s then-current market value, minus any commission charged by the broker. This value is not set by the government but rather by the marketplace itself. Interest rates are the key determinant.

However, if you have a specific buyer in mind or simply want to make a gift of your security, you may bypass the bank or broker and handle the transfer yourself. The buyer or recipient must have his or her own Treasury Direct account for the transfer to work. Get a security transfer application directly from a Federal Reserve Bank branch. The Fed handles the rest, moving the security from your Treasury Direct account to the account of the person you designate. If you are selling the security, the buyer must pay you directly; the Fed does not handle any transfer of money. Don’t be fooled by a scam artist who suggests otherwise.

To open a Treasury Direct account or get a security transfer form, you can go to the Federal Reserve Bank branch at 950 S. Grand Ave. in Los Angeles or write to P.O. Box 2077, Los Angeles, CA 90051.

Brokerage’s Foul-Up Clearly Its to Swallow

Q: I recently sold 100 shares of stock through the local branch office of a large national brokerage. The broker said the shares were worth $112 and that I would get a check for $98 after his commission was deducted. The check arrived promptly, and I cashed it. Three weeks later, the broker called back and said he had made an error; the stock had gone through a reverse split years ago and he failed to detect it. He said I was due only $7 and that I must refund the brokerage $91. Can I be held liable for this mistake? --N.B.F.

A: Even the brokers we brought your question to were amazed at your tale, especially given the rather small amount of money it involves. One would think that the public relations value--not to mention the value of brokerage employees’ time--would dictate that a brokerage swallow the mistake and write off the $91.

What should you do? A National Assn. of Securities Dealers spokesman said you are probably under no legal obligation to refund the $91. The broker clearly made a mistake and should own up to it. If you want, you could complain to the brokerage’s branch manager about how shabbily you were treated. But if you simply do nothing more, you are not breaking any laws.

Of course, there is still the question of your moral responsibility. If the mistake had been in the other direction and you were owed the $91, would you expect the brokerage to pay? Probably you would--if you ever discovered the error.

By the way, readers with complaints about their brokers should know that the NASD handles complaints regarding unethical and illegal practices by its members. Complaints must be filed in writing and should include as many specific facts and copies of documents supporting the allegations as possible. Letters should be sent to the NASD, 300 S. Grand Ave., Suite 1600, Los Angeles, CA 90071. The NASD’s authority is limited to disciplining its members for rule infractions; it cannot recover money on behalf of investors.

For restitution, investors may want to turn to one of several arbitration agencies. The American Arbitration Assn., a nonprofit group, is among the best-known. For more information about pursuing a restitution claim against a broker, request the pamphlet “Securities Arbitration Rules” from Karen Holt, c/o American Arbitration Assn., 140 W. 51st St., New York, NY 10020. Enclose a self-addressed, stamped, business-size envelope.

Importance of Timing in Sale of Residence

Q: I have a rental home that I want to convert into my principal residence. My plan is to sell the home in a few years and roll over the profits into a retirement house in another state. How long must I live in this house to make it qualify as my principal residence and not a rental? --C.S.

A: There are no hard and fast rules surrounding such transactions. Many experts recommend that you live in the converted home for at least one year before selling it and rolling over the profits into another residence. (However, if you intend to invoke your one-time, $125,000 profit exclusion at the same time, you must have lived in the house for three of the five years preceding the sale. You also must be over age 55.) Finally, remember that any depreciation you have taken on the rental reduces your tax basis in it and will affect the tax basis of your new residence.