More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
The Financial Industry Regulatory Authority said Monday that it has fined Chicago-based Nuveen Investments, the largest manager of closed-end funds, $3 million for creating misleading marketing materials used in sales of auction-rate preferred securities prior to the 2008 market collapse.
According to FINRA’s narrative of events, 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 used by the broker-dealers who sold the ARPS to retail customers.
“The brochures, also available on Nuveen’s website, failed to adequately disclose liquidity risks for ARPS,” FINRA said in a news release. The action was brought by FINRA Director Dan McClain under the supervision of Thomas Lawson, Chief Counsel.
Nuveen neither admitted nor denied wrongdoing in the settlement, but consented to the entry of the self-regulatory body’s findings.
“As part of this settlement, Nuveen neither admits to nor denies FINRA’s allegations,” the company said in a statement. “This settlement concludes a two-year investigation that followed the widespread failure of auctions for ARPS and for other auction rate securities generally beginning in mid-February 2008. In the settlement, Nuveen agreed to a censure and the payment of a $3 million fine. It is one of a number of settlements that broker dealers have entered into with FINRA in the aftermath of the collapse of the auction rate securities markets relating to disclosures in marketing materials. Nuveen has cooperated with FINRA throughout the investigation.”
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.
The ARPS were long-term securities with interest rates or dividend yields that reset periodically through an auction process. In contrast to other types of auction-rate securities,
FINRA said, the Nuveen ARPS were preferred shares issued by closed-end mutual funds to raise money for the funds to use to invest.
FINRA charged that 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,” according to the FINRA release.
Allegedly, 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 Jan. 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 charged.
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, FINRA said. In February 2008, widespread auction failures occurred throughout the auction rate securities market, including auctions for Nuveen funds ARPS.
“Nuveen was aware of facts that raised significant red flags about the ability of investors to obtain liquidity for their Nuveen auction rate securities yet failed to revise their marketing brochures to disclose these risks. This failure deprived investors of important information," said FINRA Chief of Enforcement Brad Bennett in a statement.
Read ‘February Yields Mostly Positive Results for Closed-End Funds’ at AdvisorOne.com.