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Compliance May 23, 2011
FINRA Fines Nuveen $3M over Auction Rate Securities Marketing
The Financial Industry Regulatory Authority (FINRA) has fined Nuveen
Investments, LLC, $3 million for creating misleading marketing materials
used in sales of auction rate preferred securities (ARPS).
Reported by Rebecca Moore
FINRA said that by early 2008, over $15 billion of Nuveen Funds’ ARPS had been sold to retail customers by third-party broker-dealers. Nuveen did not sell the ARPS to customers, but in its role as distributor for Nuveen Funds, it created marketing brochures that were used by the broker-dealers who sold the ARPS to retail customers.
FINRA found that the brochures, also available on Nuveen’s
Web site, failed to adequately disclose liquidity risks for ARPS.
Nuveen neglected to include the risks that auctions for the ARPS could
fail, investments could become illiquid and that customers might be
unable to obtain access to funds invested in the ARPS for a period of
time should the auctions fail. Instead, the brochures contained
misleading statements which described the ARPS as safe and liquid
investments. Also, FINRA found that Nuveen failed to maintain adequate
supervisory procedures to ensure that the materials it used to market
the auction rate preferred securities accurately described the features
and risks of the securities.
FINRA also said Nuveen failed to
revise disclosures in their brochures after a lead auction manager
responsible for approximately $2.5 billion of the ARPS notified Nuveen
in early January 2008 that it intended to stop managing Nuveen auctions.
On January 22, 2008, the lead manager did not submit support bids in an
auction for a series of Nuveen auction rate preferred stock and that
auction failed.
FINRA found that the auction failure and Nuveen's
inability to find a replacement for the lead manager raised serious
questions for Nuveen about whether investors in Nuveen's ARPS would be
able to obtain liquidity for the securities in future auctions. Despite
this, Nuveen failed to revise its marketing brochures to reflect these
risks and, thus, the brochures were misleading. In February 2008,
widespread auction failures occurred throughout the auction rate
securities market, including auctions for Nuveen funds ARPS.
To
date, the Nuveen funds have redeemed approximately $14.2 billion of the
$15.4 billion of the ARPS that were outstanding on February 12, 2008. As
part of the settlement, Nuveen agreed to use its best efforts to effect
redemptions of any remaining outstanding Nuveen funds ARPS.
Nuveen neither admitted nor denied the charges, but consented to the entry of FINRA's findings.