First Southwest Co. agreed to pay $150,000 to the Securities and Exchange Commission to settle charges that it engaged in undisclosed auction-rate securities practices that may have affected investors' returns.
First Southwest neither admitted nor denied the charges. But the firm's chief executive officer, Hill Feinberg, said in a statement that the firm is committed "to ensuring that our auction rate practices meet with the highest industry standards," citing those established by the Securities Industry and Financial Markets Association.
"We have always supported the efforts of the Securities Exchange Commission to improve disclosure in capital markets and are pleased to have this matter resolved," Feinberg said in the statement.
The agreement with First Southwest is the fourth settlement with market firms tied to undisclosed practices in the $300 billion-plus municipal, corporate, and preferred stock auction-rate securities market, and follows by almost two years the commission's $13 million global settlement with 15 broker-dealer firms over similar charges.
That settlement did not include First Southwest because the firm did not disclose its practices until well after it was reached, SEC officials said yesterday. They stressed that yesterday's settlement is separate from a probe that began earlier this year, following the meltdown in the auction-rate market, to investigate how auction-rate securities were sold to investors.
Meanwhile, yesterday's announcement comes 16 months after the SEC reached a $1.6 million settlement with three auction agents - Deutsche Bank Trust Company Americas, the Bank of New York, and Wilmington Trust Co. - saying they violated the securities laws by accepting broker-dealer bids after deadlines and allowed dealers to intervene in auction - actions that may have affected the rates paid on the securities.
It also follows last May's $200,000 SEC settlement with Citi, which merged with Legg Mason Wood Walker Inc. in late 2005, tied to charges that Legg Mason, from at least Jan. 1, 2003, through June 30, 2004, intervened in auctions for the securities by bidding for its own proprietary account without disclosing to issuers or investors that it was doing so.
In its announcement yesterday, SEC said that during the same period, First Southwest intervened in auctions by bidding for its proprietary account to prevent failed auctions, in which case the issuer would have to pay an above-market rate set by a predetermined formula, and to prevent so-called all-hold auctions, which is the below-market rate set when all current holders want to hold their positions so that there are no securities for sale in the auction.
Auction-rate securities are bonds the interest rates on which are periodically reset through auctions, typically every seven, 14, 28, or 35 days. Until the auction-rate market evaporated earlier this year, broker-dealers marketed auction-rate securities to issuers as an alternative to variable-rate financing, and to investors as an alternative to money market funds.
Until the market dried up earlier this year, issuers selected one or more broker-dealers like First Southwest to underwrite the auction-rate offering and-or manage the auction process. A broker-dealer that manages an auction is typically paid 25 basis points for the par value of the securities it manages.
The issuer also selects an auction agent to receive the orders from the broker-dealer or dealers, and to calculate the clearing rate for the auction. The auction agent typically is paid one basis point for the principal outstanding amount of the securities on an annualized basis to administer an auction in accordance with an agreement.