Saturday, April 17, 2010

FINRA Press Release: HSBC Securities

April 12, 2010 – FINRA Fines HSBC Securities (USA) $1.5 million, US Bancorp $275,000 for Auction Rate Securities Violations 

The Financial Industry Regulatory Authority (FINRA) issued a press release today announcing that 
“it has settled charges with two additional firms relating to the sale of auction rate securities (ARS) that became illiquid when auctions froze in February 2008 – HSBC Securities (USA) and US Bancorp Investments, Inc.”
 The settlement is detailed in the FINRA AWC No. 20080130571 and FINRA AWC No. 2008013863801

Auction rate securities (ARS) were first issued in the mid-1980s by corporations. The market for ARS grew rapidly over the next two decades and widely issued by a diverse range of institutions such as closed-end mutual funds, municipalities and student loan trusts. ARS were long-term floating rate securities whose coupon payments were determined at auctions that were typically held every 7 to 35 days, making ARS long-term securities with short-term floating rates. Broker dealers marketed ARS as liquid, short-term cash equivalents. However, ARS auctions failed en masse in February 2008 and proved to be illiquid and unsellable in the short-term.

SLCG has written papers on the ARS that describes the ARS, what they are, how their auctions worked, and why they failed. SLCG was also recently hired by the State of North Carolina to advise on the liquidity solutions to ARS investors who have yet been able to redeem these illiquid securities.

Investors can use our dedicated website for other in-depth analyses of security products.

Friday, April 16, 2010

FINRA Press Release: Morgan Keegan

April 7, 2010 – FINRA Files Complaint Against Morgan Keegan & Company for Misleading Customers Regarding Risks of Bond Funds and Advertising, Other Violations

The Financial Industry Regulatory Authority (FINRA) issued a press release today announcing that
“ it has filed a complaint against Morgan Keegan & Company, Inc., charging the firm with marketing and selling seven affiliated bond funds to investors using false and misleading sales materials – costing investors well over $1 billion. In addition to an unspecified fine, FINRA is seeking disgorgement of all ill-gotten profits and full restitution for affected investors.”
The statement of complaint is found here. FINRA alleges that Morgan Keegan brokers made material misrepresentations to investors concerning the bond funds. Further, it alleges that Morgan Keegan failed to train its brokers to understand the risks of the bond funds and it provided sales materials containing misleading statements about the bond funds, which led to material misrepresentations.

Dr. Craig McCann, founder of SLCG, was hired to testify in multiple arbitration panels in claims against Morgan Keegan. The results of such arbitrations can be found here in our dedicated website.

Thursday, April 15, 2010

SLCG Research: Mutual Fund's Term

SLCG released today ‘What Does a Mutual Fund’s Term Tell Investors?

Bond mutual funds are classified by Morningstar as ultra short, short, intermediate or long-term. Bond mutual funds have found a way to hold long-term bonds while being classified as ultra-short or short.

In this paper, we demonstrate how the losses suffered by these funds in 2008 can be explained by the increasing credit risks of holding long-term bonds. Furthermore, we find that the classification of these funds as ultra-short or short is clearly inconsistent with the Securities and Exchange Commission’s (SEC) definition

We recommend that mutual funds report simple weighted average maturity to protect investors from misunderstanding the risks of their bond mutual funds.