Financial agency probes firms over auction-rates
NEW YORK (Reuters) - Financial industry enforcement agents will review the auction-rate debt operations of about 40 firms industrywide starting next week, sources familiar with the investigation said on Thursday.
The sources, who declined to be identified, said the attorneys and investigators did not have the power of subpoena but were undertaking the on-site review during the weeks of August 25 and September 8 to target firms with large amounts of auction rate securities in accounts.
The probe to enforce the rules of the Financial Industry Regulatory Authority, which operates under oversight of the U.S. Securities and Exchange Commission, comes as state and federal authorities have pressed several big investment banks into settlements over their handling of the risky debt.
Regulators say brokerages misled investors into believing that auction-rate debt, which has rates that reset in periodic auctions, was safe and the equivalent of cash.
Much of the $330 billion market has been frozen since February when brokerages abandoned their traditional role as buyers of last resort.
A letter to the firms from FINRA and obtained by Reuters states in detail what investigators were asking firms to provide, including electronic lists of auction rate securities issues, auction failures and to identify employees on their auction rate securities desks.
"If applicable, identify all individuals who were involved in determining when the firm would place supporting bids or placed such bids," said the letter, which was sent to the firms during the past week.
The period covered by the investigation was June 1, 2007, through June 30, 2008, according to the document.
It also asks "whether the firm participated in surveying investor interest and providing 'price talk' guidance to customers."
The agency told the firms it was also seeking internal and external correspondence and marketing on the debt, to provide the total dollar amount of ARS held by accounts at the firm and records about complaints from customers.
Investigators want to find out whether firms continued to recommend and sell the auction rate securities while they had knowledge of problems in the debt market and whether there was collusion to prop up prices, the sources said.
They declined to identify which firms would be visited, but they said they included international and U.S. firms, bank affiliates, insurance company affiliates, independent firms and regional and small firms.
Several big banks -- including UBS (UBSN.VX), Morgan Stanley (MS.N), JPMorgan Chase & Co (JPM.N), Wachovia Corp WB.N and Citigroup (C.N) -- have agreed to buy back billions of dollars of the debt to settle charges they misled investors about its risk, although they did not admit to any wrongdoing in the settlements.
The buybacks apply largely to retail customers, charities and small to mid-size businesses.
(Editing by Phil Berlowitz)
