FINRA Slaps Nuveen With A $3 Million Fine For Use Of Misleading Marketing Materials In Sales Of ARPS

The Financial Industry Regulatory Authority (FINRA) announced on May 23, 2011 in a news release that it had fined Nuveen Investments LLC of Chicago, Illinois $3 million for using misleading marketing materials in the sales of auction rate preferred securities (ARPS). The Nuveen auction rate preferred securities (ARPS) were long term securities with interest rates or dividend yields that were reset periodically through an auction process. The Nuveen ARPS were different from other ARS in that they were preferred shares issued by closed end mutual funds to raise investible funds. According to the FINRA release it was alleged that Nuveen knew there were red flags relating to liquidity for investors in the ARPS but they failed to revise their marketing materials to disclose the risks and depriving investors of valuable information.

There was something over $15 billion worth of Nuveen Funds’ ARPS sold to retail customers by early 2008. Nuveen was a distributor who created marketing materials for the broker dealers who actually sold the ARPS to retail customers. Those materials failed to adequately disclose the liquidity risks to investors, especially the fact that if auctions for the ARPS failed the investments could become illiquid causing investors to be unable to access their funds. To the contrary, Nuveen described the ARPS as being safe and liquid investments. In early January 2008, a lead auction manager notified Nuveen that it intended to stop managing Nuveen ARPS auctions and a replacement manager could not be found. Despite this the marketing materials were not revised to truthfully disclose the liquidity risks to the investors. The Nuveen ARPS were met with the same illiquidity of all other auction rate securities (ARS) in February 2008, when the market froze.

Nuveen has redeemed roughly $14.2 billion of the $15.4 billion of the ARPS that were outstanding in February 2008 efforts continue to redeem the remaining ARPS, according to the release by FINRA.

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