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FINRA Widens ARS Probe


The Financial Industry Regulatory Authority (FINRA) has widened its ongoing auction rate securities (ARS) probe with a sweep letter aimed primarily at sellers, rather than lead managers, of the illiquid instruments.

The six-page letter, sent late last month to 40 broker/dealers, contains a laundry list of requests covering the period from June 1, 2007 through June 30, 2008. Firms must produce all documents, electronic or otherwise, indicating any arrangement with other parties, including ARS issuers and auction agents, to sell, remarket or solicit bids for the securities.

"It appears that FINRA is interested in doing a thorough investigation, given the depth and breadth of the request," said Brian Rubin, a partner in the law firm Sutherland Asbill & Brennan and former deputy chief counsel of enforcement at FINRA predecessor NASD.

State regulators and the Securities and Exchange Commission have thus far pursued charges against firms-including Citigroup, UBS Financial Services, Merrill Lynch, Goldman Sachs and Deutsche Bank-that have been lead underwriters as well as sellers of the securities.

"Now, it appears that FINRA is looking at selling firms," Rubin said. FINRA spokesperson Herb Perone would not comment on the letter except to say how many firms received it.

Allegations against lead managers have focused on internal communications detailing problems with the auction rate securities market that were not disclosed when the products were sold.

With the new sweep letter, according to Rubin, FINRA appears to be investigating whether the selling brokers obtained information from the lead managers that they failed to disclose to clients. The self-regulatory organization is also looking at basic sales practices including whether the securities were suitable investments, misrepresentations were made and advertising was fair and balanced.

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