NEW YORK — The Financial Industry Regulatory Authority, or Finra, has reached agreements in principle with three securities firms to settle charges relating to the sale of auction-rate securities.
City National Securities of Beverly Hills, Calif.; BNY Mellon Capital Markets LLC of New York, a unit of Bank of New York Mellon Corp.; and Bank of Montreal's Harris Investor Services Inc. of Chicago signed agreements with the self-regulatory authority 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 compensate individual investors who sold ARS below par after Feb. 28, 2008.
City National Securities will pay a fine of $315,000, while BNY Mellon will pay a fine of $250,000 and Harris is being fined $150,000.
An independent, non-industry arbitrator will resolve investor claims for any consequential damages — those arising from the inability to access funds invested in ARS.
Each of the principle agreements is subject to being formalized in an approved settlement document called a Letter of Acceptance, Waiver and Consent. The firms will neither admit nor deny the charges in those documents, but will consent to Finra findings, according to a statement from Finra.
A Bank of New York spokesman said he wouldn't comment on regulatory matters.
Finra announced similar agreements in principle with five firms in September, including Comerica Securities Inc. and First Southwest Company of Dallas, Tex. A total of more than $1.8-billion were eligible for repurchase under the terms of that settlement. The firms also agreed to pay a total of $3.25 million in fines, with individual fines ranging from $250,000 to $1.65 million.
Investigations continue at a number of additional firms — particularly "downstream" firms that were not involved in the underwriting of management of the auction process, but instead served as distributors placing bids on behalf of their customers at the auctions, according to a Finra spokesman.
Brad Hintz, a banking analyst with Sanford Bernstein, told Dow Jones Newswires earlier this month that municipal auction rate buy back settlements may be a source of negative publicity for the firms involved, but aren't necessarily a bad deal for them. The issuer's default rate — which is typically very high — applies when a Dutch auction fails, he said, and until municipalities call in their securities.
"They may think [w]e're going to be hammered in the press publicly and pay a fine, but buying these things in doesn't mean we will lose a lot of money because they will all trade back to par," he said.
A statement from Finra said its investigation of firms involved in the settlements on Thursday and in September found evidence that each sold ARS using advertising, marketing materials or other internal communications with its sales force that weren't fair and balanced and did not provide a sound basis for investors to evaluate the benefits and risks of the investment. Finra also found evidence that each firm failed to establish and maintain a supervisory system designed to achieve compliance with securities laws and Finra rules applicable to the marketing and sale of 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 a written statement.
Each firm has agreed to notify customers promptly, said Finra. 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. The firms have also agreed to make efforts to provide liquidity to other investors who purchased during the same time period but who are not eligible for the initial repurchase. Those efforts may include offers to repurchase ARS and/or offers of low- or no-interest loans, according to Finra.
William Jacobson, director of the securities litigation clinic at Cornell Law School in Ithaca, N.Y, told Dow Jones Newswires on Thursday that regulators, in general, have taken a "good lead" in getting firms to make good on auction rate securities. "Strong activity by regulators should enable many investors to recoup their money," he said.