FINRA Fines Two SunTrust Firms $5M for ARS Violations

WASHINGTON — The Financial Industry Regulatory Authority fined SunTrust Robinson Humphrey Inc. and SunTrust Investment Services Inc. a total of $5 million for disclosure and other failures related to underwriting and selling auction-rate securities.

Both firms are Atlanta-based broker-dealer subsidiaries of SunTrust Banks Inc. SunTrust RH was fined $4.6 million for failing to disclose to customers the increased risk that auctions could fail, for sharing material non-public information, and for misleading marketing materials that claimed ARS were liquid and safe.

The firm also did not have adequate trading or supervisory procedures relating to auction-rate securities, according to FINRA. The self-regulator fined SunTrust IS $400,000 for having deficient sales material, procedures and training.

“SunTrust Robinson Humphrey and SunTrust Investment Services withheld information about the ARS market, which prevented their sales representatives from making proper recommendations and their customers from making informed decisions about ARS,” said Brad Bennett, FINRA executive vice president and chief of enforcement. “Because of that, the customers were left holding illiquid securities when the auctions failed.”

The FINRA fines cover Municipal Securities Rulemaking Board rule violations that occurred between May 31, 2006, and Feb. 28, 2008, and finalize agreements in principle that regulators reached with the firm in September 2008.

The firms issued the following statement: “The failure of the auction-rate securities market was a result of the weakened economy and we were in no better position to predict its failure than anyone else; beyond that, the settlement speaks for itself and we’re pleased to have the matter resolved and behind us.”

According to FINRA, late in the summer of 2007, SunTrust RH became aware that the ARS market was troubled and that auctions might fail. But it failed to disclose the concerns to sales personnel who continued to market ARS as liquid and safe. The firm also shared non-public information with its parent bank, which negligently disclosed ARS information that had not been publicly announced.

SunTrust RH was lead underwriter for 36 ARS issues totaling $1.3 billion in par value. It was co-manager for 74 issues totaling $4.5 billion in par value. It also bought and sold ARS for customers and held about $1.6 billion of them in customer accounts as of Feb. 28, 2008.

SunTrust RH entered into an agreement with regulators to voluntarily buy back ARS. It broadened its efforts in December 2008 and thus far has repurchased $381 million of auction-rate securities from certain customers, FINRA said.

SunTrust IS bought and sold ARS for customers. It used ads and marketing materials for auction-rate securities that were misleading by not disclosing the risk that auctions could fail and that the ARS could become illiquid.

As of Feb. 28, 2008, SunTrust IS held $616 million of ARS and auction-rate preferred securities in the accounts of ­retail customers. It also entered into buyback agreements with regulators and so far has repurchased $262 million of ARS and ARPS from retail customers, FINRA said.

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