ComplianceSeptember 2, 2009

FINRA Settles ARS Violations with Three More Firms

<p>Northwestern Mutual Investment Services, LLC, City Securities Corporation, and Fifth Third Securities, Inc., are the latest firms to settle charges with FINRA over the sale of auction-rate securities (ARS).</p>

Reported by Ellie Behling

FINRA has racked up settlements with 12 firms, imposing a total of $3.2 million in fines and ordering the return of more than $1.3 billion to investors left with illiquid investments when auctions froze in February 2008 (see “FINRA Settles ARS Violations with Four More Firms”).

In the latest settlements, the firms will pay fines and have agreed to repurchase failed ARS sold to customers, both retail and institutional.

Northwestern Mutual Investment Services, LLC, of Milwaukee was fined $200,000 and will repurchase $103 million in failed securities; City Securities Corporation of Indianapolis was fined $250,000 and will repurchase $13.1 million; and Fifth Third Securities, Inc., of Cincinnati was fined $150,000 and will repurchase $11.9 million.

FINRA noted that Northwestern Mutual has already completed the repurchase of ARS from all customer accounts, including positions that advisory clients of an investment advisory affiliate held. Whether advisory firms should take responsibility for the sale of ARS has been debated, most recently in a New York state lawsuit against Charles Schwab and Co. (see “New York State AG Sues Schwab Over ARS”).

FINRA found that the firms used marketing materials with its sales force that were not fair and balanced, or that failed to contain adequate disclosure of the risks of ARS. The regulator also found that each firm failed to establish and maintain proper supervisory system with respect to the sale of ARS.

“The failure of firms to adequately disclose the risks associated with auction-rate securities left customers unprepared for the failure of the auction market last year and the resulting consequences,” said FINRA Executive Vice President and Chief of Enforcement Susan L. Merrill. “As with our previous ARS settlements, FINRA’s first priority has been to ensure investor access to the money they had invested in ARS. We are gratified that these firms agreed to initiate or complete offers to buy back frozen ARS from their customers.”