WASHINGTON — Four “downstream” brokerages agreed to buy back $554 million of auction-rate securities and to pay $850,000 in fines for sales practices violations and faulty supervisory procedures, the Financial Industry Regulatory Authority announced yesterday.
The self-regulator found that the four firms — Janney Montgomery Scott LLC, NatCity Investments Inc., M&T Securities Inc., and M&I Financial Advisors Inc. — failed to adequately disclose to customers the potential for ARS auctions to fail and the consequences of such failures.
“Firms have an obligation to use fair and balanced marketing materials when selling any security, including auction-rate securities,” Susan Merrill, FINRA executive vice president and chief of enforcement, said in a statement. “This includes full disclosure of liquidity risks, which unfortunately became a reality in the ARS market last year.”
Specifically, PNC Financial Services Group Inc.’s NatCity Investments, which is based in Cleveland, was fined $300,000; M&T Securities of Buffalo was fined $200,000; Janney Montgomery Scott of Philadelphia was fined $200,000; and M&I Financial Advisors of Milwaukee was fined $150,000. Buyback amounts were not specified for each of the four firms.
Merrill added that as with the five previous final ARS settlements FINRA has reached with firms, the self-regulator’s “top priority was to assure investors’ access to the millions of dollars they invested.”
But in the statement, FINRA said that two units of SunTrust — SunTrust Investment Services Inc., and SunTrust Robinson Humphrey Inc., both based in Atlanta — backed out of similar agreements in principle with FINRA that already had been announced. FINRA said its investigation into both firms’ ARS-related activities is continuing.
FINRA said it has now reached 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. Though no charges against individual brokers have been brought, FINRA spokesman Herb Perone said the self-regulators investigations were ongoing.
Without admitting or denying wrongdoing, the four new firms agreed to repurchase at par ARS that were purchased by individual investors and some institutions between May 31, 2006, and Feb. 28, 2008, and to make whole retail investors who sold ARS below par after Feb. 28, 2008, when the ARS market collapsed.
A spokesperson for Janney said the firm began voluntarily buying back ARS from customers in August 2008 and that it was pleased this was recognized by FINRA in its settlement. A PNC spokesman declined to comment on the NatCity settlement. .
A spokesman for M&I said: “M&I proactively contacted the very small number of affected individual investors and refunded their investment plus accrued interest. These refunds were completed in October of 2008. None of these investors lost any money and the cost to M&I was nominal.”