FINRA Fines HSBC Securities (USA) $1.5 million, US Bancorp $275,000 for Auction Rate Securities Violations
FINRA Found HSBC Sold ARS After Increased Risk Became Apparent; Both Firms Voluntarily Bought Back Over $700 Million in ARS from Customers
Washington, DC — The Financial Industry Regulatory Authority (FINRA) announced today that it has settled charges with two additional firms relating to the sale of auction rate securities (ARS) that became illiquid when auctions froze in February 2008 – HSBC Securities (USA) and US Bancorp Investments, Inc.
HSBC, which was fined $1.5 million, had by July 2008 repurchased more than 90 percent of its then current customers' ARS holdings and in October 2008 it offered to repurchase all of the remaining ARS held in those customers' HSBC accounts. In total, HSBC repurchased more than $562 million of ARS held by its customers. As part of the settlement announced today, HSBC has agreed to offer to repurchase additional ARS sold to certain customers who transferred accounts before its previous buy-backs and to customers who chose not to participate in its prior offers.
US Bancorp Investments, which was fined $275,000, has already completed a repurchase of more than $150 million of ARS held in customer accounts.
To date, FINRA has concluded ARS-related settlements with 14 firms, imposing a total of nearly $5 million in fines. Firms that have reached settlements with FINRA have returned more than $2 billion to investors. Investigations continue at a number of additional firms.
"The failure of each of these firms to adequately disclose the risks associated with auction rate securities left customers unprepared for the failure of the auction market," said James S. Shorris, FINRA Executive Vice President and Executive Director of Enforcement. "As with our previous ARS settlements, FINRA's first priority has been to ensure investor access to the money frozen in their ARS investments. We are pleased that these firms have completed or agreed to complete offers to buy back frozen ARS from their customers."
FINRA found that during the relevant period, HSBC sold in excess of $1 billion worth of student loan, municipal and preferred ARS to its customers.
FINRA found up until February 2008 – when widespread auction failures froze ARS holdings – HSBC retail brokers recommended and sold ARS to customers, representing them as liquid and safe investments. But as of December 2007, it had become apparent to HSBC that credit markets were deteriorating and there were increased investment risks in ARS. In a December 2007 conference call, HSBC managers continued to suggest that brokers recommend ARS to retail customers, describing spikes in yields as "very advantageous" to customers. While noting "never say never" to the possibility of a failed auction, the managers indicated that they did not believe problems in the credit markets would affect ARS.
In an email after the conference call, a broker recommended to one of the managers that brokers should inform clients about the possibility and consequences of a failed auction for ARS: The next day, an ARS trading desk employee unsuccessfully sought the manager's permission to send an email to the firm's brokers concerning the heightened risk of owning ARS. The subsequent measures the firm took to notify its brokers of the risks associated with ARS were inadequate. The firm's retail brokers continued to recommend ARS as safe and liquid investments while failing to adequately notify customers of these increased risks.
FINRA also found that HSBC's advertising and marketing materials were not fair and balanced and that HSBC had sold certain unregistered ARS securities to customers who were not qualified to own them.
In the US Bancorp matter, FINRA found that the firm used internal marketing materials prepared by other securities firms that did not provide a balanced or adequate disclosure of risks of ARS. They described ARS as a "great place for short-term money" and a "cash alternative," but failed to disclose the liquidity risks of ARS. Other materials compared ARS yields to those of money market securities but failed to disclose the material differences between the investments, including differences in liquidity, safety and potential fluctuation of return. FINRA also found that US Bancorp failed to maintain procedures reasonably designed to ensure that its registered representatives accurately described ARS to customers during sales presentations. FINRA further found that ARS were added to the firm's approved product list without first being subjected to the usual due diligence process.
HSBC and US Bancorp agreed to a comprehensive settlement plan that has been applied in FINRA's previous ARS settlements. In these settlements, FINRA took into account that both firms had initiated their own repurchase offers and that each had offered to buy back ARS that had not been purchased at their firms.
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.
As part of the settlements, the firms also agreed to participate in a special FINRA-administered arbitration program for eligible investors to resolve investor claims for consequential damages - that is, damages investors may have suffered from their inability to access funds invested in ARS. Additional information about the program 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 2009, members of the public used this service to conduct 18.5 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 non-governmental regulator for all securities firms doing business in the United States. 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 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 registered firms. For more information, please visit our Web site at www.finra.org.