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.

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.

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