Press Releases

Search Press Releases
Search by date
Choose From Date
Choose To Date
SearchClear

Sutherland Focus Report #3: FINRA Auction Rate Securities Fines on the Rise in 2011

March 15, 2012

WASHINGTON (March 15, 2012) – According to a recently released annual review by Sutherland Asbill & Brennan LLP, in 2011 Auction Rate Securities (ARS) violations were a primary focus for FINRA. In the Sutherland FINRA Sanctions Survey, ARS sanctions were listed as having generated the third-largest amount of fines for the regulator in 2011.  FINRA reported $10 million in fines from seven ARS matters in 2011, an increase from 2010’s $1.78 million in sanctions from two cases. This jump in ARS-related fines caused this category to appear on Sutherland’s Top Enforcement Issues list for the first time in 2011. This Sutherland FINRA Focus dives deeper into the regulator’s recent enforcement actions and highlights a few of the key 2011 ARS cases.

The chart below indicates the total number of enforcement actions and fines that FINRA has reported during each of the past six years for ARS matters.

FINRA’s ARS Sanctions Statistics, 2006 - 2011

 

Fines

Reported

Percentage Change

Percentage of Total FINRA Fines

Cases Reported

Percentage Change

2006

0

---

---

0

---

2007

0

---

---

0

---

2008

0

---

---

0

---

2009

$3.47 million

---

7%

13

---

2010

$1.78 million

(49%)

4%

2

(87%)

2011

$9.9 million

456%

15%

7

250%

 
These statistics show that ARS cases have only recently caught FINRA’s attention, likely because the ARS market functioned well until the recent financial crisis. Many of these ARS cases also involve alleged advertising violations (which helped push advertising cases to the top of Sutherland’s Top Enforcement Issues list in recent years). ARS cases generally result in substantial fines for FINRA, averaging approximately $700,000 per case. Nearly all of the ARS cases have involved the alleged failure to disclose the investment risks, including the possibility that auctions could fail.

The largest 2011 ARS fine was a $4.6 million sanction that a firm paid for making allegedly false representations and omissions regarding the safety and liquidity of ARS. The firm acted as an underwriter for ARS and its customers had $1.6 billion of these securities in their accounts with the firm. However, according to FINRA, the firm failed to disclose its concerns about auction failures to its sales representatives, many of whom continued to offer these securities as safe and liquid investments. The marketing materials used by the firm purportedly failed to provide a fair description of ARS because they did not sufficiently disclose that ARS auctions could fail and instruments become illiquid. Brad Bennett, FINRA’s Chief of Enforcement, noted that this prevented sales representatives from “making proper recommendations and their customers from making informed decisions about ARS."

Another firm was fined $3 million for creating allegedly misleading ARS marketing materials used with retail customers. FINRA found that these advertisements did not adequately disclose the liquidity risks of ARS (including the possibility of auction failure) and that they improperly described these securities as “safe and liquid investments." Bennett indicated that the firm “was aware of facts that raised significant red flags about the ability of investors to obtain liquidity," but still “failed to revise their marketing brochures to disclose these risks." Bennett further noted that the firm’s alleged ARS advertising violations “deprived investors of important information."

A firm and two of its representatives were fined a total of more than $1.5 million for allegedly failing to disclose material facts to institutional investors concerning the risks of ARS transactions. FINRA also asserted that the two representatives failed to disclose to investors that 32 ARS transactions resulted in them earning additional compensation or that higher-yield products were available that offered lower commissions. This case involved approximately 40 corporate investors that invested $650 million in ARS. In addition, the individual representatives improperly acted as agents for both the buyer and the seller in some ARS transactions without notifying their customers of this conflict. The firm also failed to deliver official transaction statements for a number of ARS transactions and had deficient or missing ticket orders for more than half of the ARS trades executed during the relevant time period. Similar to many other ARS cases, the advertising materials used by the firm described ARS as a “cash equivalent investment" akin to money markets and implied they were short-term investments. The firm was also required to pay back $425,000 in fees to the affected customers.

The ARS cases show that when market events affect a particular product, FINRA will examine many facets of the interactions between member firms and retail and/or institutional investors, including advertising and the appropriateness of disclosures. As a result, firms may wish to consider reviewing disclosures, particularly with respect to market-sensitive products.

Related Practices/Industries

Our Story

Sutherland Asbill & Brennan LLP is an international law firm helping the Fortune 100, industry leaders, sector innovators and business entrepreneurs solve their biggest challenges and reach their business goals. Dedicated to unfaltering excellence in client service, we are known for our business savvy and industry intelligence, providing creative and custom solutions for each of our clients. Industry and business experience makes the difference for our clients.

click to watch Videocast: DOL Fiduciary Rule Litigation Impacts
Videocast: DOL Fiduciary Rule Litigation Impacts
Atlanta, GA
Washington, DC
© 2016 Sutherland Asbill & Brennan LLP / Sutherland (Europe) LLP
MYBRIEFCASE
Add this page to MYBRIEFCASE
Add Page to MYBRIEFCASE
News/Commentary - Sutherland Focus Report #3: FINRA Auction Rate Securities Fines on the Rise in 2011
Current MYBRIEFCASE Pages
Save ChangesDownload MYBRIEFCASEClear All