The Financial Industry Regulatory Authority (FINRA) announced today that it has entered into final settlements with four additional firms to settle charges relating to the sale of Auction Rate Securities (ARS) that became illiquid when auctions froze in February 2008. To date, FINRA has concluded final settlements with nine firms, imposing a total of $2.6 million in fines and guaranteeing the return of more than $1.2 billion to investors. Investigations continue at a number of additional firms.
The settlements announced today are with NatCity Investments, Inc. of Cleveland, which was fined $300,000; M&T Securities, Inc. of Buffalo, which was fined $200,000; Janney Montgomery Scott LLC of Philadelphia, which was fined $200,000 and M&I Financial Advisors, Inc. of Milwaukee, which was fined $150,000. All four firms agreed to initiate or complete offers to repurchase ARS sold to their customers where the auctions for the ARS had failed.
FINRA also announced that SunTrust Investment Services, Inc. and SunTrust Robinson Humphrey, Inc., both of Atlanta, determined not to finalize previously announced settlements in principle with FINRA. FINRA’s investigation into both firms’ ARS-related activities is continuing.
“Firms have an obligation to use fair and balanced marketing materials when selling any security, including Auction Rate Securities,” said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. “This includes full disclosure of liquidity risks, which unfortunately became a reality in the ARS market last year. As with our previous ARS settlements, FINRA’s top priority was to assure investors’ access to the millions of dollars they invested in ARS.”
FINRA’s investigation found that each firm sold ARS using advertising, marketing materials or other internal communications with its sales force that were not fair and balanced and therefore did not provide a sound basis for investors to evaluate the benefits and risks of purchasing ARS. In particular, the firms failed to adequately disclose to customers the potential for ARS auctions to fail and the consequences of such failures. FINRA’s investigation also found evidence that each firm failed to establish and maintain a supervisory system reasonably designed to achieve compliance with the securities laws and FINRA rules with respect to the marketing and sale of ARS.
In the actions announced today, the firms agreed to a comprehensive settlement plan that has been applied in FINRA’s previous ARS settlements. That plan includes several elements, including offers to repurchase at par ARS that were purchased by individual investors and some institutions between May 31, 2006, and Feb. 28, 2008. The firms have also agreed to make whole individual investors who sold ARS below par after Feb. 28, 2008.
In addition to individual retail ARS investors, the buy-back offers include non-profit charitable organizations and religious corporations or entities, trusts, corporate trusts, corporations, pension plans, educational institutions, incorporated non-profit organizations, limited liability companies, limited partnerships, non-public companies, partnerships, personal holding companies and unincorporated associations that made individual ARS purchases and whose account value did not exceed $10 million.
Each firm is required to provide notice to its eligible customers promptly. Repurchases must begin no later than 30 days after the settlement is approved and must be completed no later than 60 days after settlement approval. Beginning no later than six months after settlement approval, each firm has also agreed to make its best efforts to provide liquidity to all other investors who purchased ARS during the same time period but who were not eligible for the initial repurchase.