On September 2, 2009, FINRA announced that it had entered into final settlement agreements with Northwestern Mutual Investment Services, LLC, City Securities Corporation and Fifth Third Securities to settle charges relating to the sale of Auction Rate Securities (“ARS”). Each of the firms agreed to initiate or complete offers to repurchase ARS sold to their customers in connection with failed ARS auctions.
According to FINRA, its investigation of the firms uncovered evidence that each firm employed the use of unfair and unbalanced advertising, marketing materials or other communications in its efforts to sell ARS, and did not provide investors with a sound basis on which to evaluate the benefits and risks of investing in ARS. Moreover, FINRA’s investigation of the firms revealed that each firm failed to maintain adequate supervisory systems reasonably designed to achieve compliance with the securities laws and FINRA rules with respect to the marketing and sale of ARS.
Under the terms of the agreements, each firm will offer to repurchase at par value certain outstanding ARS purchased by investors between May 31, 2006, and February 28, 2008. As a result, a total of approximately $128 million of ARS are eligible for repurchase. Additionally, the firms have agreed to compensate individual investors who sold ARS below par after February 28, 2008 and pay fines totaling $600,000. Going forward, any additional claims against the firms for consequential damages resulting from investors’ inability to access funds invested in ARS will be resolved by an independent, non-industry arbitrator.