FINRA Fines Zions Direct $225,000 for Failure to Disclose Potential Conflict of Interest in its Online CD Auctions
Firm's Claims About CD Auctions Also Violated FINRA Advertising Rules
WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Zions Direct, Inc. $225,000 for failing to disclose the potential conflict of interest created by the participation of its affiliate, Liquid Asset Management (LAM), in online CD auctions conducted by Zions involving certificates of deposit (CDs) issued by Zions-affiliated banks.
Zions Direct, based in Salt Lake City, began auctioning CDs through its website in February 2007. Prior to November 2008, the firm failed to disclose LAM's participation in the auctions to retail investors bidding in the auctions. FINRA found that the closing yields in some auctions may have been higher had LAM not participated.
LAM's participation in the auctions for its customers had the potential to disadvantage other auction participants – including retail customers – who may have received lower CD yields than they would have otherwise. Also, LAM's participation could potentially benefit the issuing banks, also affiliated with Zions, who might have paid higher yields on the CDs purchased through the auctions had LAM not participated.
"Firms are obligated to disclose to customers and prospective customers material information about their products and services," said James S. Shorris, FINRA Executive Vice President and Acting Chief of Enforcement. "Here, the CD auction participants were never told that they were effectively competing against Zions Direct's affiliate in the firm's own auctions, and that, as a result, bidders may receive lower yields. This was material information, and a potential conflict of interest, that should have been disclosed."
Beginning in November 2008, Zions Direct generally disclosed LAM's participation in the auctions, yet still failed to disclose the potential conflict of interest between the issuing banks affiliated with Zions and its customers who participated in the auctions.
FINRA also found that Zions Direct sent its current and prospective customers advertisements related to its CD auctions which contained misleading, unwarranted, and exaggerated statements and claims, and claims for which no reasonable basis had been provided. For example, some of the firm's communications contained the following statements:
- "Where else can you bid with the big boys and win?"
- "Crush The National Average For CD Yields."
- "Higher yields on CDs."
In addition, FINRA determined that the firm published market clearing yields on its website without adequately disclosing that they typically would not reflect the closing yields at the end of the auctions. For example, on March 20, 2009, the Zions website displayed a one-month CD with a market clearing yield of 27.06 percent. The same auction closed on March 23, 2009, with a yield of 1.3 percent. While the disclosure documents indicated how the yield was calculated, such disclosures were not prevalent or apparent.
In concluding this settlement, Zions Direct 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 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 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 www.finra.org.