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Regulation and Compliance > Federal Regulation > FINRA

FINRA Settles With 3 Firms Over Securities

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The Financial Industry Regulatory Authority has announced today that it has agreed to settlements with 3 more firms to settle charges of failing to disclose the risks of auction rate securities they sold.

The ARS became illiquid when auction sales of the securities froze in February 2008.

The settlements announced today included Northwestern Mutual Investment Services L.L.C., a unit of Northwestern Mutual Life Insurance Company, Milwaukee, which was fined $200,000.

The others were City Securities Corporation, Indianapolis, fined $250,000; and Fifth Third Securities Inc., a unit of Fifth Third Bancorp, Cincinnati, fined $150,000.

According to FINRA, all 3 firms agreed to offer to buy back ARS sold to their customers where the auctions for the ARS had failed–around $103 million for Northwestern Mutual, $13.1 million for City Securities and $11.9 million for Fifth Third.

“We are gratified that these firms agreed to initiate or complete offers to buy back frozen ARS from their customers,” said L. Merrill, executive vice president and chief of enforcement for FINRA, Washington.

FINRA said its investigation found that each firm sold ARS using advertising, marketing materials or communications with its sales force that were not fair and balanced or that failed to contain adequate disclosure of the risks of ARS, such as the potential for ARS auctions to fail.

FINRA also found that each firm failed to supervise the sales adequately to assure compliance with securities laws and FINRA rules for selling ARS.

The firms agreed to a settlement plan that includes offers to repurchase at par ARS that individual investors and some institutions purchased between May 31, 2006, and Feb. 28, 2008, according to FINRA. The firms also agreed to make whole individual investors who sold ARS below par after Feb. 28, 2008.

FINRA noted that it gave Northwestern Mutual Investment Services credit for initiating its own offers in September 2008 to buy back ARS from all customer accounts, regardless of whether the ARS were purchased through the firm, and included positions that advisory clients of an investment advisory affiliate held.

In a statement, a Northwestern Mutual spokeswoman pointed out the agreement grew out of an industry-wide inquiry prompted by the collapse of the ARS market in early 2008.

The spokeswoman, Jean Towell, noted that FINRA acknowledged that Northwestern voluntarily took action to assure its clients were paid back for their investments in the ARS. All ARS holdings bought by ARS clients were either repurchased by Northwestern Mutual or bought back by issuers, the said.

None of the firms either admitted or denied the charges in consenting to the findings, FINRA notes.

To date, FINRA says it has concluded final settlements with 12 firms in the sale of ARS, imposing a total of $3.2 million in fines and guaranteeing the return of more than $1.3 billion to investors. Investigations continue at a number of additional firms, FINRA says.


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