For over a year now, investors have had regulatory agency support getting their Auction Rate Securities (ARS) out of the deep freeze.
Recently, the Financial Industry Regulatory Authority (FINRA) announced a settlement with an additional three firms who sold these investments, only to have the auctions freeze-up in February 2008. FINRA has now settled with a total of 12 firms.
The dollar amounts are staggering. Investors have been guaranteed the return of $1.3 billion and the firms have been fined $3.2 million. In the most recent settlement, Northwestern Mutual Services, LLC, of Milwaukee was fined $200,000, City Securities Corporation of Indianapolis was fined $250,000 and Fifth Third Securities, Inc., of Cincinnati was fined $150,000.
The universal problem with the ARS investments appears to have been the way, and to whom, they were sold. FINRA's Executive Vice President and Chief of Enforcement, Susan L. Merrill, noted that 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."
Generally, the failures of firms who sold these securities involved marketing materials or communications with firm sales forces that did not inform internal personnel of the potential problems with liquidity with these investments. Investors often purchased these believing that they were similar to Certificates of Deposit and that their investments could be accessed on a regular basis in the event liquidity was needed.
That turned out to be wrong in theory and practice as the auctions completely dried-up in the financial crisis in early 2008 and investors were stuck holding frozen assets.
As part of this particular settlement and according to FINRA's announcement, the firms involved have agreed to participate in a "special FINRA-administered arbitration program to resolve investor claims for consequential damages - that is, damages investors may have suffered from their inability to access funds invested in ARS." This program includes expedited arbitration proceedings that will be paid for by the firms.
Related Web Resources
Detailed information on ARS procedures and background, for both investors and industry professionals, can be found on FINRA's website.
If you would like information on ARS procedures, including FINRA arbitration practice, please contact the lawyers at Gusrae, Kaplan, Bruno and Nusbaum, PLLC.
