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

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.  

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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.  

Schwab, Fidelity, Wachovia and other firms have also come under fire for their marketing of ARS (see "Cuomo Schwab Suit over ARS Sales Expected This Week").
The Markets May 23, 2011

Report Says It May be Time to Consider Real Assets

State Street’s SPDR University suggests that investors would be well-served to start thinking about how exposure to real assets can help position their portfolio for rising inflation.
Reported by

The report, “Real Assets, Inflation Protection Solutions with Exchange Traded Products,” says that with rising food and gas prices slowly beginning to push inflation higher, real assets such as TIPS, Real Estate, Commodities, Natural Resources, Infrastructure, etc., can be more successful than stocks and bonds, which tend to generate meager returns during periods of rising inflation.

Because of stock volatility and historically low yields for bonds, investors may seek to generate positive returns by investing in assets that are potentially driving inflation, such as oil, or providing portfolio diversification during turbulent economic times, such as gold. “These real assets have historically outperformed stocks and bonds during periods of accelerating inflation and provided additional potential diversification benefits for investors seeking to control portfolio volatility, according to research and analysis,” the report said.  

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A blend of real assets has historically demonstrated the ability to provide significant inflation protection for suitable investors. According to the report, from 1970-2010, a portfolio of 20% inflation-protected bonds, 30% real estate investment trusts (REITs), 25% commodities, and 25% global natural resources stocks has resulted in significantly higher returns than stocks and bonds in periods of rising inflation. In periods of stable inflation, the blend of real assets offers comparable returns to bonds and commodities. In periods of declining inflation, the real assets blend significantly outperforms commodities.  

The report contends a real asset strategy can be easily implemented using exchange-traded products, including exchange-traded funds (ETFs) and exchange-traded notes (ETNs). A real assets blend could be implemented using ETFs as follows:  

  • 20% Inflation Protected Securities ETFs (TIPS), 
  • 30% REITs ETFs (15% US REITs, 15% non-US REITs), 
  • 25% Natural Resources/Energy ETFs, and 
  • 25% Commodity ETFs (15% broad-based commodity, 10% gold). 

More about SPDR University is at http://www.spdru.com.

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