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Auction Rate Securities Sales In Regulators' Cross-Hairs

The recent slew of lawsuits brought against some of the nation's largest broker-dealers that sold Auction Rate Securities ("ARS") to customers has not gone unnoticed. The SEC and FINRA, on the heels of the lawsuit filings, have each launched independent investigations of their own into the sales and marketing practices employed by firms selling ARS. And commentary submitted in recent days suggests emphasis of the investigations will, at least in part, lead to focus on the suitability of the sales.

In a March 31, 2008 investor alert, FINRA discussed the impact the collapse of the ARS market has had on investors. Significantly, a large portion of its discussion concerned the liquidity of the securities and how "due to recent developments in the credit market—including downgrades in the credit ratings of bond issuers and bond insurers—a significant number of auctions have failed, leaving some investors who counted on immediate access to their funds wondering about their options." FINRA also recently sent a survey to brokerage firms specifically inquiring about who the firm sold ARS to (i.e. retail individual, high net worth individual, non-professional institutional, or professional institutional customer) and whether the firm was willing to offer margin loans to customers using ARS as collateral. And in Regulatory Notice 08-17, effective April 1, 2008, FINRA added "three new product categories for use by member firms in reporting customer complaints relating to auction rate securities."

Taken together, these actions leave little doubt that firm ARS sales and supervision may come under the lens of regulatory inquiry for the foreseeable future and likely remain one of the main topics of inquiry for 2008, given the fact hundreds of billions of dollars of ARS were sold.

Full post as published by OverRegd - Securities Regulation and Litigation Blog on April 10, 2008 (boomark / email).