FINRA Announces Agreements in Principle with Three Additional Firms to Settle Auction Rate Securities Violations
Agreements Include Offers to Repurchase Over $60 Million of ARS Holdings at Par
Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) announced today that it has reached agreements in principle with City National Securities (CNS), of Beverly Hills, CA, BNY Mellon Capital Markets, LLC of New York and Harris Investor Services, Inc. of Chicago, to settle charges relating to the sale of Auction Rate Securities (ARS). Each of the principle agreements is subject to being formalized in an approved settlement document called a Letter of Acceptance, Waiver and Consent (AWC).
Last month, FINRA announced similar agreements in principle with five firms. Investigations continue at a number of additional firms.
In the actions announced today, CNS, BNY Mellon and Harris have agreed to offer to repurchase at par ARS that were purchased by individual investors and some institutions between May 31, 2006, and Feb. 28, 2008. A total of more than $60 million of ARS are eligible for repurchase. The firms have also agreed to make whole individual investors who sold ARS below par after Feb. 28, 2008. CNS will pay a fine of $315,000, while BNY Mellon will pay a fine of $250,000 and Harris is being fined $150,000.
The firms also agreed to the appointment of an independent, non-industry arbitrator to resolve investor claims for any consequential damages - that is, damages they may have suffered from their inability to access funds invested in ARS.
"In all of our Auction Rate Securities investigations and settlements, FINRA's primary goal continues to be the restoration of investors' access to the millions of dollars they invested in ARS," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement.
In addition to individual investors, those eligible for ARS repurchase and/or payments for ARS sold below par include non-profit charitable organizations and religious corporations or entities. Trusts, corporate trusts, corporations, pension plans, educational institutions, incorporated non-profit organizations, limited liability companies, limited partnerships, non-public companies, partnerships, personal holding companies and unincorporated associations that made individual ARS purchases and whose account value did not exceed $10 million will also be eligible.
Each firm has agreed to provide notice to its eligible customers promptly. Repurchases must begin no later than 30 days after the settlement is approved and must be completed no later than 60 days after settlement approval. Beginning six months after settlement approval, each firm has also agreed to make its best efforts to provide liquidity to all other investors who purchased during the same time period but who were not eligible for the initial repurchase. Those best efforts may include offers to repurchase ARS and/or offers of low- or no-interest loans.
FINRA's investigation has found evidence that each firm sold ARS using advertising, marketing materials or other internal communications with its sales force that were not fair and balanced and therefore did not provide a sound basis for investors to evaluate the benefits and risks of purchasing ARS. FINRA's investigation also found evidence that each firm failed to establish and maintain a supervisory system reasonably designed to achieve compliance with the securities laws and FINRA rules with respect to the marketing and sale of ARS.
In the forthcoming formal settlement documents, the firms will neither admit nor deny the charges, but will consent to the entry of FINRA's findings.
Earlier this year, FINRA released guidance for investors caught in the auction failures in the Investor Alert Auction Rate Securities: What Happens When Auctions Fail.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2007, members of the public used this service to conduct 6.7 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
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