FINRA Announces Agreements in Principle with Five Firms to Settle Auction Rate Securities Violations
Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) announced today that it has reached agreements in principle with SunTrust Investment Services, Inc. and SunTrust Robinson Humphrey, Inc., both of Atlanta, GA, Comerica Securities, Inc. of Detroit, MI, First Southwest Company of Dallas, TX, and WaMu Investments, Inc., of Irvine, CA, to settle charges relating to the sale of Auction Rate Securities (ARS). Each of the principle agreements is subject to being formalized in an approved settlement document called a Letter of Acceptance, Waiver and Consent (AWC).
Each firm has agreed to offer to repurchase at par ARS that were purchased by individual investors and some institutions between May 31, 2006, and Feb. 28, 2008. A total of more than $1.8 billion of ARS are eligible for repurchase. The firms have also agreed to make whole individual investors who sold ARS below par after Feb. 28, 2008. The firms will pay a total of $3.25 million in fines, with individual fines ranging from $250,000 to $1.65 million.
Each firm has also agreed to have an independent, non-industry arbitrator resolve investor claims for any consequential damages - that is, damages they may have suffered from their inability to access funds invested in ARS.
The agreements announced today are the result of FINRA's increased scrutiny of the auction rate market, which began in March of this year, when required regulatory filings showed an increase in the number of investor complaints against broker-dealers regarding ARS. Nearly 50 additional investigations have been opened, and more are expected. FINRA initially questioned more than 200 firms regarding their holdings of ARS in both proprietary and customer accounts. FINRA then conducted sweeps of mostly "downstream" firms - that is, firms that were not involved in the underwriting or management of the auction process, but instead served as distributors placing bids on behalf of their customers at the auctions.
"FINRA's primary goal in reaching these agreements was to ensure that investors disadvantaged in failed auctions will be able to access the millions of dollars they invested in Auction Rate Securities," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. "We are pleased that these firms have stepped up and agreed to do the right thing for their customers, and we have given them credit for doing so in assessing their fines."
In addition to individual investors, those eligible for ARS repurchase and/or payments for ARS sold below par 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 will also be eligible.
Each firm has agreed 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 six months after settlement approval, each firm has also agreed to make its best efforts to provide liquidity to all other investors who purchased during the same time period but who were not eligible for the initial repurchase. Those best efforts may include offers to repurchase ARS and/or offers of low- or no-interest loans.
The principle agreements announced today call for payment of the following fines: SunTrust Robinson Humphrey, $1.65 million; Comerica, $750,000; SunTrust Investment Services, $300,000; First Southwest, $300,000; and WaMu, $250,000.
FINRA's investigation has found evidence 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. 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 forthcoming formal settlement documents, the firms will neither admit nor deny the charges, but will consent to the entry of FINRA's findings.
Earlier this year, FINRA released guidance for investors caught in the auction failures in the Investor Alert Auction Rate Securities: What Happens When Auctions Fail.
ARS are typically debt instruments (corporate or municipal bonds) with a long-term maturity for which the interest rate is regularly reset through a Dutch auction. ARS can also refer to a preferred stock for which the dividend is reset through the same process. In the Dutch auction, broker-dealers submit bids on behalf of potential buyers and sellers of the bond. Based on the submitted bids, the auction agent will set the next interest rate as the lowest rate to match supply and demand. Auctions are typically held every 7, 28, or 35 days. Since ARS holders do not have the right to put their securities back to the issuer, a failed auction means that the investors cannot access their investment until the next successful auction or until the security matures, which may not occur for many years.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2007, members of the public used this service to conduct 6.7 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
FINRA is the largest non-governmental regulator for all securities firms doing business in the United States. Created in 2007 through the consolidation of NASD and NYSE Member Regulation, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business - from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms.
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