The Financial Industry Regulatory Authority on Tuesday said it fined SunTrust Banks Inc. $5 million for violations related to the sale of auction-rate securities.
A bulk of the fine was levied to a SunTrust unit that underwrote the ARS and allegedly failed to adequately disclose the increased risk that auctions could fail. The Atlanta-based lender also used advertising and marketing materials that "were not fair and balanced," Finra alleged.
Finra found that beginning in 2007, SunTrust became aware of the stresses in the ARS market that raised the risk that auctions might fail. At the same time, SunTrust Robinson Humphrey was told by its parent to reduce its use of the bank's capital and to begin 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 leader broker dealer.
As these stresses increased, Finra alleged the firm failed to adequately disclose the risks to sales representatives while encouraging them to sell SunTrust ARS issues in order to reduce the company's inventory. In early 2008, SunTrust stopped supporting ARS auctions, knowing that those auctions would fail and the ARS would be illiquid, Finra said.
ARS are long-term borrowings engineered to have short-term features, with the interest rate reset at weekly or monthly auctions. The $330 billion market collapsed in early 2008 as the credit squeeze worsened.
SunTrust spokesman Hugh Suhr said the failure of the ARS market was the result of the weakened economy, saying the company was "in no better position to predict its failure from anyone else."
"Beyond that, the settlement speaks for itself and we're please to have the matter resolved and behind us," Suhr said.
