The Financial Industry Regulatory Authority fined Chicago-based Nuveen Investments $3 million for creating and distributing misleading brochures to promote the sale of auction rate preferred securities.
Auction rate securities are debt securities sold through a dutch auction that are sold at an interest rate that will clear the market at the lowest possible yield. But they act like short-term securities because they are resold with new interest rates in periodic auctions.
In Nuveen's case, its auction rate preferred securities (ARPS) were preferred shares issued by closed end mutual funds to raise money for the funds to use to invest.
FINRA found that by early 2008, more than $15 billion worth of Nuveen Funds' ARPS had been sold to retail customers by third-party broker-dealers.
Nuveen did not sell the ARPS directly to customers but did create marketing brochures as a distributor for Nuveen Funds.
The investigation found that the brochures, which were also published on the firm's website, failed to adequately disclose liquidity risks for ARPS and, worse, contained misleading statements which described the ARPS as safe and liquid investments. It also concluded that Nuveen failed to maintain "adequate supervisory procedures" to ensure its marketing materials accurately described all the features and risks of the investment product.
Last month, FINRA nailed Jefferies & Co. with a $1.5 million fine and ordered the investment bank to repay another $425,000 for failing to disclose additional compensation to institutional clients and other conflicts of interest related to questionable sales of auction rate securities in 2007 and 2008.
Nuveen failed to revise its brochures after a lead auction manager for $2.5 billion of the ARPS notified it in early January 2008 that it intended to stop managing Nuveen auctions. Later that month, the lead manager did not submit support bids in an auction for a series of Nuveen auction rate preferred stock, causing the auction to fail.
FINRA officials said the auction failure and Nuveen's inability to find a replacement for the lead manager "raised serious questions for Nuveen about whether investors in Nuveen's ARPS would be able to obtain liquidity" in future auctions.
Still, FINRA said, the firm still didn't revise the brochures with the appropriate disclosure information. The regulatory agency said there were widespread auction failures in February 2008 throughout the auction rate securities market, including auctions for Nuveen funds ARPS.
"Nuveen was aware of facts that raised significant red flags about the ability of investors to obtain liquidity for their Nuveen auction rate securities yet failed to revise their marketing brochures to disclose these risks," Brad Bennett, FINRA's chief of enforcement, said in a statement. "This failure deprived investors of important information."
As part of its settlement with FINRA, Nuveen said it would use its best efforts to effect redemptions of any remaining outstanding Nuveen funds ARPS. As of today, roughly $14.2 billion of the $15.4 billion in Nuveen funds ARPS have been redeemed.
"We are pleased to put this matter behind us so that we can continue to focus our efforts on refinancing the Nuveen closed-end funds’ remaining ARPS, and on working with the funds for the benefit of all shareholders," Nuveen spokesperson Kathleen Cardoza said in a statement.
Nuveen in its settlement neither admitted nor denied the charges but consented to the entry of FINRA's findings.