More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Regulatory Oversight of Investment Advisors Although the regulatory environment is in a state of flux, it is imperative that RIAs adhere to their compliance obligations. To ensure compliance, RIAs and IARs must fully understand what those obligations are.
The Financial Industry Regulatory Authority FINRA fined SunTrust Robinson Humphrey and SunTrust Investment Services Tuesday for violations related to the sale of auction rate securities (ARS).
According to FINRA, SunTrust RH underwrote the ARS and was fined $4.6 million for “failing to adequately disclose the increased risk that auctions could fail, sharing material non-public information, using sales material that did not adequately disclose the risks associated with ARS, and having inadequate supervisory procedures and training concerning the sales and marketing of ARS.”
SunTrust IS was fined $400,000 for having “deficient ARS sales material, procedures and training.”
The fines come after a similar enforcement action against Nuveen Investments on May 24 for producing misleading ARS marketing material. Also in late May, an arbitration judgment awarded U.S. Airways $15 million from three registered representatives after the airline claimed “unsuitability, unauthorized purchases, negligence, and failure to supervise relating to its claims involving auction rate securities.”
In April, New York Jefferies Group agreed to pay $2 million to settle claims that three brokers failed to disclose conflicts of interest when selling auction-rate securities.
In the latest case, FINRA found that beginning in late summer 2007, SunTrust RH became aware of “stresses in the ARS market that raised the risk that auctions might fail. At the same time, SunTrust RH was told by its parent, SunTrust Bank, to reduce its use of the bank's capital and began to examine whether it had the financial capability in the event of a major market disruption to support all ARS in which it acted as the sole or lead broker-dealer. As these stresses increased, the firm failed to adequately disclose the increased risk to its sales representatives while encouraging them to sell SunTrust RH-led ARS issues in order to reduce the firm's inventory.”
As a result, FINRA claimed certain SunTrust RH sales representatives continued to sell ARS as “safe and liquid.”
Additionally, FINRA found that on Feb. 13, 2008, SunTrust RH shared material non-public information regarding the potential refinancing of certain ARS issues with SunTrust Bank, which was contemplating investing in ARS.
Both SunTrust RH and SunTrust IS used advertising and marketing materials that FINRA claimed were not fair and balanced, and both firms failed to maintain adequate supervisory procedures and training concerning their sales and marketing of ARS.