FINRA Fines Suntrust $5M For ARS Violations
The Financial Industry Regulatory Authority (FINRA) has issued a notice that SunTrust Robinson Humphrey, Incorporated (SunTrust RH) and SunTrust Investment Services, Incorporated (SunTrust IS) have been fined for securities violations related to the sale of auction rate securities (ARS). SunTrust RH was the underwriter of the ARS and was fined $4.6 million. It allegedly failed to adequately disclose the increased risk that the auction process could fail. It was also discovered that they had inadequate supervisory and training procedures for the sales and marketing of ARS. SunTrust IS was fined $400,000 for the same reasons.
In its investigation, FINRA found that SunTrust RH had knowledge of the problems with the ARS market in 2007 that increased the possibility that auctions could fail. During the same time frame, SunTrust RH was told by SunTrust Bank, the parent company, to take a look at whether it had the where-with-all to support the ARS it had served as lead broker-dealer for.
As these problems became more predominant the firm failed to disclose the increased risk of auction failure to sales personnel. As a matter of fact, they were encouraged to sell SunTrust RH ARS issues to get rid of their inventory. Therefore, these ARS continued to be sold as being safe and liquid investments. In February 2008, the ARS market froze and investors were unable to access their money or sell their ARS.
FINRA discovered that SunTrust RH and SunTrust IS used flawed sales and marketing materials that did not provide investors with sufficient detail to properly evaluate the investment and make an informed decision to make the investment. Most importantly, investors were not properly warned of the possibilities that the ARS auctions could fail, resulting in the inability to access funds for lengthy time periods.
Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "SunTrust Robinson Humphrey and SunTrust Investment Services withheld information about the ARS market which prevented their sales representatives from making proper recommendations and their customers from making informed decisions about ARS. Because of that, the customers were left holding illiquid securities when the auctions failed."
SunTrust RH and SunTrust IS have stepped up to buy back roughly $381 million and $262 million of ARS, respectively, from investors after the investigation began. Both firms have agreed to participate in special FINRA ARS arbitration programs, which provides for a streamlined process involving limited discovery, shortened timeframe and recovery of consequential damages.
If you have suffered losses from auction rate securities (ARS), please contact our securities law firm for a confidential, no obligation consultation at 1-800-259-9010.