City National Securities, BNY Mellon Capital Markets LLC, and Harris Investor Services Inc. have agreed to repurchase a total of more than $60 million of illiquid auction-rate securities and pay $715,000 in fines to settle charges over alleged abusive ARS sales practices, the Financial Industry Regulatory Authority announced yesterday.
The FINRA settlements-in-principle with the firms - none of which were among the top 20 underwriters of ARS, according to Thomson Reuters -are the latest in a series of federal and state regulator agreements with banks and broker-dealers over charges they sold ARS as cash-like and safe investments just before the market collapsed in February and investors were left holding the securities.
FINRA said its ARS investigations are continuing at a number of additional firms.
"In all of our ARS investigations and settlements, FINRA's primary goal continues to be the restoration of investors' access to the millions of dollars they invested in ARS," Susan L. Merrill, FINRA's executive vice president and chief of enforcement, said in a release yesterday.
Settlements between firms and federal and state regulators, such as New York Attorney General Andrew Cuomo and Massachusetts Commonwealth Secretary William Galvin, have resulted in firms' offers to buy back least $55.5 billion of ARS from individual investors and pay more than $165 million in fines.
The FINRA agreements follow the blueprint established by earlier settlements. The firms agreed to buy back at par ARS that were purchased by individuals between May 31, 2006, and Feb. 28, 2008. They also agreed to make whole any individuals who sold ARS below par after Feb. 28, 2008. Individual investors include all account holders with less than $10 million.
The firms must inform ARS investors of their eligibility under the settlement agreements. Repurchases must begin no later than 30 days after the settlements are approved and must be completed within 30 days after that.
All three firms agreed to pay fines. City National, based in Beverly Hills, Calif., will pay $315,000, while BNY Mellon in New York will pay $250,000 and Harris in Chicago $150,000. The firms will not admit or deny wrongdoing while complying with FINRA.
BNY Mellon and Harris declined to comment about the settlement and did not say how much of the $60 million in liquidity will be provided by each firm. A spokeswoman from City National said the firm was informing investors.
FINRA's investigations found evidence that the firms sold ARS using sales practices that did not give investors information about risks associated with ARS. The self-regulator also said each firm failed to comply with securities laws and FINRA rules for marketing and sales of ARS.
FINRA will appoint an independent arbitrator to resolve investors' claims for consequential damages they suffered as a result of being unable to access funds invested in ARS.
The firms also agreed to use "best efforts" to provide liquidity to institutional investors beginning six months after the settlement's approval. Institutional investors - clients with more than $10 million in accounts - may receive low or no-interest loans, under the agreement. Many companies with large holdings of ARS have been unable to access their funds and have been forced to write down the value of their ARS holdings in third quarter earnings reports.