FINRA Press Release: Auction Rate Securities

FINRA Fines Nuveen $3 Million for Use of Misleading Marketing Materials Concerning Auction Rate Securities

The Financial Industry Regulatory Authority (FINRA) issued a press release this week announcing that

"it has fined Nuveen Investments, LLC, of Chicago, $3 million for creating misleading marketing materials used in sales of auction rate preferred securities (ARPS). The Nuveen Funds' ARPS were a form of auction rate securities, which are long-term securities with interest rates or dividend yields that are reset periodically through an auction process. In contrast to other types of auction rate securities, the Nuveen ARPS were preferred shares issued by closed end mutual funds to raise money for the funds to use to invest."

The settlement is detailed in the FINRA AWC No. 2008013056701.

Auction rate securities (ARS) were first issued in the mid-1980s by corporations. The market for ARS grew rapidly over the next two decades and widely issued by a diverse range of institutions such as closed-end mutual funds, municipalities and student loan trusts. ARS were long-term floating rate securities whose coupon payments were determined at auctions that were typically held every 7 to 35 days, making ARS long-term securities with short-term floating rates. Broker dealers marketed ARS as liquid, short-term cash equivalents. However, ARS auctions failed en masse in February 2008 and proved to be illiquid and unsellable in the short-term.

SLCG has written papers on the ARS that describes the ARS, what they are, how their auctions worked, and why they failed. SLCG was also recently hired by the State of North Carolina to advise on the liquidity solutions to ARS investors who have yet been able to redeem these illiquid securities.

Investors can use our dedicated website for other in-depth analyses of security products.