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Category Archives: SunTrust

SunTrust Fined Over Auction-Rate Securities

The Financial Industry Regulatory Authority (FINRA) has fined SunTrust Robinson Humphrey (SunTrust RH) and SunTrust Investment Services (SunTrust IS) $5 million for violations connected to sales of auction-rate securities.

According to FINRA, SunTrust RH, which underwrote the investments, failed to adequately disclose to investors the fact that the auctions for the products could fail. Moreover, the company did not share material non-public information with investors, use sales materials that properly described the risks associated with auction-rate securities or have adequate supervisory procedures and training in place concerning the sales and marketing of auction-rate securities.

FINRA says SunTrust IS also had deficient ARS sales material, procedures and training.

Beginning in late summer 2007, FINRA says that SunTrust RH became aware of certain stresses in the ARS market and the risk that auctions might fail. At the same time, SunTrust RH was told by its parent, SunTrust Bank, to reduce its use of the bank’s capital and to examine whether it had the financial capability in the event of a major market disruption to support all ARS in which it acted as the sole or lead broker/dealer.

As the stresses in the ARS market increased, FINRA says SunTrust failed to adequately disclose those increased risks to its sales representatives. Instead, it encouraged them to sell SunTrust RH-led ARS issues in order to reduce its inventory. Consequently, certain SunTrust RH sales representatives continued to sell auction-rate securities as safe and liquid investments.

In February 2008, SunTrust RH stopped supporting ARS auctions, knowing that those auctions would fail and the auction-rate securities would become illiquid.

Additionally, FINRA found that on Feb. 13, 2008, SunTrust RH shared material non-public information regarding the potential refinancing of certain ARS issuers with SunTrust Bank, which were contemplating investing in ARS. This information was material because SunTrust Bank was assured that if the auction market froze, it would likely be able to dispose of the illiquid investments on the date the auction-rate securities were refinanced.


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