Compliance May 7, 2009

FINRA Settles ARS Violations with Four More Firms

The Financial Industry Regulatory Authority (FINRA) said it entered settlements with four more firms relating to the sale of auction rate securities (ARS).
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Early last year the securities became illiquid when auctions froze. Since then, regulators have investigated numerous firms for selling the securities (see “The Bill Gets Bigger for UBS,’ “Wachovia Settles Auction-Rate Securities Charges,’ and “Brokers: Being Forced to Buy Back ARS Is Unfair’).

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, according to a news release from FINRA.

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All four firms agreed to initiate or complete offers to repurchase ARS sold to their customers where the auctions for the ARS had failed.

However, SunTrust Investment Services, Inc. and SunTrust Robinson Humphrey, Inc., both of Atlanta, determined not to finalize previously announced settlements in principle with FINRA. FINRA said it will continue its investigations into the ARS-related activity of both firms.

FINRA’s investigation found that each firm sold ARS without providing proper materials to evaluate the benefits and risks of purchasing the securities. The agency also said the firms failed to keep up a supervisory system to comply with securities laws and FINRA rules with respect to the marketing and sale of ARS.

“Firms have an obligation to use fair and balanced marketing materials when selling any security, including auction rate securities,” said Susan Merrill, FINRA executive vice president and chief of enforcement, in the release. “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.”

To date, FINRA said it 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.

More information is available at www.finra.org/ars.

Data & Research May 7, 2009

As Net Worth Goes Down, Interest in Finances Goes Up

Being a millionaire just isn’t what it used to be.
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A Fidelity study found that almost half (46%) of U.S. millionaires (having $1 million or more in investable assets) do not feel wealthy and are taking action to reassess and rebuild their wealth. That’s more than twice as many as when the survey was conducted last year (see “More Millionaires Using Independent Advisers“).

That is likely because millionaires have seen an average 19% drop in household income, a 19% drop in investable assets, and a 28% decline in the value of their real estate holdings, according to a press release of the survey results.

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While many respondents are increasing their allocation to fixed-income investments, others are increasing their exposure to stock, according to Fidelity. About a third (32%) of millionaires plan to increase exposure to fixed income, bonds, and CDs over the next 12 months; likewise, 31% plan to invest more in individual stocks.

Looking for More Information

The crisis has had another effect on millionaires: a greater appetite for financial information. Millionaires surveyed by Fidelity are spending more time gathering financial information, from reading and listening to financial news to discussing finances.

Almost one-third (32%) are spending more time discussing financial matters with family and friends, while 18% are spending more time checking their investment performance, and 20% are increasing the time they spend monitoring or calculating their net worth, according to Fidelity.

Bracing for Tax Hikes

Seventy-two percent of respondents expect higher capital gains taxes in the next five years. Furthermore, 67% expect a higher dividend tax rate, and 62% expect a higher federal income tax rate.

Anticipating the tax hikes, half of millionaires plan to sell poorly performing investments in the next 12 months to offset capital gains on other, better-performing investments, the survey found. Millionaires surveyed also plan to increase their pre-tax income deductions to avoid higher federal income taxes, while almost a third (29%) will invest more in tax-advantaged mutual funds to avoid higher dividend taxes.

The study, commissioned by Fidelity and conducted by Richard Day Research, looked at 1,012 financial decisionmakers at U.S. millionaire households.

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