Finra, Nuveen agree to $3M settlement over marketing of auction-rate preferred securities

Regulator claims marketing material produced by B-D was misleading; settlement reached
JUL 25, 2011
The Financial Industry Regulatory Authority Inc. has hit Nuveen Investments LLC, the broker-dealer subsidiary of Nuveen Investments Inc., with a $3 million fine for allegedly creating misleading materials in the marketing of auction-rate preferred securities. Nuveen was one of a number of closed-end fund providers that suffered when the auction-rate market effectively shut down in 2008, leaving preferred shareholders in funds managed by Nuveen and other firms stuck with paper they couldn't redeem. Auction-rate securities are bonds with rates that periodically reset at auctions. In theory, an ARS offers a higher interest rate than normally would be paid for a short holding period. Municipalities auction-rate preferred securities to boost the performance of their investment portfolios. Closed-end fund managers, like Nuveen, issued preferred auction-rate securities to attract retail investors. According to the Finra complaint, by early 2008, over $15 billion of Nuveen's auction-rate preferred securities had been sold to retail customers by broker-dealers. While Nuveen didn't sell the securities, it did create the marketing materials that brokers used to sell them. And those brochures “failed to adequately disclose liquidity risks for ARPS,” according to a statement issued by Finra today. “Nuveen neglected to include the risks that auctions for ARPS could fail, investments could become illiquid and that customers might be unable to access funds invested in the ARPS for a period of time should the auctions fail,” Finra said in its release. Finra also alleged that Nuveen failed to update the brochures after Lehman Brothers Holdings Inc., which managed about $2.5 billion of ARPS, notified Nuveen in January that it would stop managing Nuveen auctions, according to its statement. With the settlement, Nuveen neither admitted or denied wrongdoing, according to a statement issued by Nuveen. Since the freezing of the ARPS market, Nuveen has launched a “comprehensive communications campaign” to keep shareholders informed about the market, Nuveen said in its statement. “We are pleased to put this matter behind us so that we can continue to focus our efforts on refinancing the closed-end funds' remaining ARPS, and on working with the funds for the benefit of all shareholders,” Kathleen Cardoza, a Nuveen spokeswoman said in a statement. The asset manager has completed redemptions of more than $14 billion of the original $15 billion in its funds outstanding ARPS, Ms. Cardoza said. “Nuveen Investments have sought a number of solutions to restore liquidity at par to all Nuveen funds' preferred shareholders and to reduce the expected cost of leverage over time for Nuveen funds' common shareholders,” Ms. Cardoza wrote in an e-mail.

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