FINRA Press Release: Auction Rate Securities

FINRA Fines Jefferies $1.5 Million for Failing to Disclose Additional Compensation Paid and Conflicts in Sale of Auction Rate Securities

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

"it has fined Jefferies & Company, Inc. $1.5 million for failing to disclose additional compensation received and conflicts in connection with the sale of auction rate securities (ARS). FINRA also ordered Jefferies to repay $425,000 in fees and commissions earned from the sale of ARS to the affected customers."

The settlement is detailed in the FINRA AWC No. 2008013863701.

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.