FINRA Announces Agreements with Three Additional Firms to Settle Auction Rate Securities Violations
Northwestern Mutual Investment Services, City Securities, Fifth Third Securities Settlements Include Total Fines of $600,000, Repurchase of Over $128 Million in ARS Holdings
Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) announced today that it has entered into final settlements with three 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 12 firms, imposing a total of $3.2 million in fines and guaranteeing the return of more than $1.3 billion to investors. Investigations continue at a number of additional firms.
The settlements announced today are with Northwestern Mutual Investment Services, LLC, of Milwaukee, which was fined $200,000; City Securities Corporation, of Indianapolis, which was fined $250,000; and Fifth Third Securities, Inc., of Cincinnati, which was fined $150,000.
All three firms agreed to initiate or complete offers to repurchase ARS sold to their customers where the auctions for the ARS had failed — approximately $103 million for Northwestern Mutual, about $13.1 million for City Securities and approximately $11.9 million for Fifth Third Securities.
"The failure of firms to adequately disclose the risks associated with auction rate securities left customers unprepared for the failure of the auction market last year and the resulting consequences," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. "As with our previous ARS settlements, FINRA's first priority has been to ensure investor access to the money they had invested in ARS. We are gratified that these firms agreed to initiate or complete offers to buy back frozen ARS from their customers."
FINRA's investigation found that each firm sold ARS using advertising, marketing materials or communications with its sales force that were not fair and balanced, or that failed to contain adequate disclosure of the risks of ARS, 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 individual investors and some institutions purchased 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.
FINRA noted in the settlement with Northwestern Mutual Investment Services that the firm received additional credit for initiating its own offers in September 2008 to buy back ARS from all customer accounts, irrespective of whether the ARS were purchased through the firm, and including positions that advisory clients of an investment advisory affiliate held. The firm has completed its repurchases.
As part of the settlement plan, the firms also agreed to participate in a special FINRA-administered arbitration program to resolve investor claims for consequential damages - that is, damages investors may have suffered from their inability to access funds invested in ARS. The program provides for expedited arbitration proceedings 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. 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.
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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