FINRA Announces Agreements with Three Additional Firms to Settle Auction Rate Securities Violations

 

The settlements announced were 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.

 

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, according to FINRA, 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.

 

According to FINRA, 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 February 28, 2008. The firms also agreed to make whole individual investors who sold ARS below par after February 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.

 

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.

 

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. According to FINRA, investigations continue at a number of additional firms.