The Financial Industry Regulatory Authority announced Thursday it has reached settlements with units of HSBC and U.S. Bancorp related to the sale of auction rate securities that became illiquid when auctions froze in February 2008.
HSBC Securities, which was fined $1.5 million, had by July 2008 repurchased more than 90% of its then customers’ ARS holdings and in October 2008 it offered to repurchase all of the remaining auction rate securities held in those customers' HSBC accounts.
In total, HSBC repurchased more than $562 million of auction rate securities. As part of the settlement, HSBC agreed to offer to repurchase additional auction rate securities sold to certain customers who transferred accounts before its previous buybacks and to customers who chose not to participate in its prior offers.
U.S. Bancorp Investments [USB], which was fined $275,000, has already completed a repurchase of more than $150 million of auction rate securities.
With these settlements, FINRA has now concluded 14 ARS-related settlements with 14 firms, imposing a total of nearly $5 million in fines. Firms that have reached settlements with FINRA have returned more than $2 billion to investors.
The regulator said that investigations continue at a number of additional firms.
"The failure of each of these firms to adequately disclose the risks associated with auction rate securities left customers unprepared for the failure of the auction market," James S. Shorris, FINRA executive vice president and executive director of enforcement, said in a press release. "As with our previous ARS settlements, FINRA's first priority has been to ensure investor access to the money frozen in their ARS investments. We are pleased that these firms have completed or agreed to complete offers to buy back frozen ARS from their customers."
FINRA found HSBC sold more than $1 billion of student loan, municipal and preferred auction-rate secuties to its customers through 2008. The regulator alleged U.S. Bancorp used internal marketing materials prepared by other securities firms that did not provide a balanced or adequate disclosure of risks associated with auction-rate securities.
In concluding these settlements, neither HSBC or U.S. Bancorp admitted or denied the charges, but consented to the settlement.
HSBC Securities said in a statement that it was among the first institutions to voluntarily offer to repurchase "at par from its customers all auction rate securities held at the firm."