FINRA Announces Agreements with Four Additional Firms to Settle Auction Rate Securities Violations
Settlements Include Total Fines of $850,000, Offers to Initiate or Complete Repurchase of $554 Million in Customer ARS Holdings at Time ARS Auctions Seized
Washington, D.C. — 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.
FINRA noted that in the settlements announced today, each firm received credit for actions already taken to provide extraordinary remediation and other benefits to their ARS customers. Janney Montgomery Scott was credited for initiating its own offers in October 2008 to buy back frozen ARS from all customer accounts, irrespective of whether such ARS were purchased through the firm. Janney Montgomery Scott has already completed its repurchases. In addition, the firm was credited for extending cost-neutral loans to affected customers in March 2008, shortly after the ARS auctions failed. M&I Financial was credited for initiating its own offers in August 2008 to buy back ARS from those customers from whom it had not already repurchased ARS earlier in the year. M&I Financial has already completed its repurchases. M&T Securities was credited for initiating its own offers in December 2008 to buy back frozen ARS from customer accounts, without regard to when such ARS were purchased, and for providing cost-neutral lines of credit and demand notes through M&T Bank. NatCity was credited for having previously bought back ARS held by customers from whom it received complaints.
As part of the settlement plan, the firms also agreed to participate in a special FINRA-administered arbitration program to resolve investor claims for any consequential damages - that is, damages they may have suffered from their inability to access funds invested in ARS. Under this program, ARS investors may participate in an expedited arbitration paid for by the firm. The participating firm may not contest liability related to the illiquidity of the ARS holdings, nor to the ARS sales, including any claims of misrepresentations or omissions by the firm's sales agents. To speed the arbitration process under the special procedure, cases claiming consequential damages under $1 million will be decided by a single public (non-securities industry) arbitrator. In cases with consequential damage claims of $1 million or more, the parties can, by mutual agreement, expand the panel to include three public arbitrators. Additional information can be found at www.finra.org/ars.
In concluding these settlements, the firms neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
After auctions for these securities began to fail in February 2008, FINRA released guidance for investors in the Investor Alert Auction Rate Securities: What Happens When Auctions Fail.
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 2008, members of the public used this service to conduct 11.6 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through comprehensive regulation. FINRA touches virtually every aspect of the securities business - from registering and educating all industry participants to examining securities firms; writing and enforcing 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 firms.
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