It’s an old story, the brouhaha over auction rate securities. But today’s SEC announcement (it settled with TD Ameritrade over ARS) is another reminder: When your brokerage tells you it has dreamed up a new security for you to sell to your high-net-worth clients, best make sure you really—really, really—know what the devil it is you are selling.
That’s because the SEC announced today that yet another brokerage misled investors when offering auction rate securities. This time it was TD Ameritrade, without admitting or denying guilt, who settled with the SEC “for making inaccurate statements when selling auction rate securities (ARS) to customers.”
Like the settlements against Citigroup, UBS, Wachovia and others, TD Ameritrade “will provide its customers the opportunity to sell back to TD Ameritrade any ARS that they bought prior to the collapse of ARS market in February 2008.” The customers in the settlement include smaller clients, such as retail investors, small businesses and institutions—any client with $10 million in assets and under. (Larger institutions should have known better, presumably.)
This magazine has chronicled the mess ARS created for retail advisors, who thought they were bagging a little extra yield for their wealthy clients and yet still enjoying relatively good liquidity. Of course, the securities were too good to be true, although in defense of financial advisors and brokerage management, only a handful of busted auctions ever plagued the ARS market over two decades. (That said, in 2006 an SEC official gave a little noticed warning—in a speech to a luncheon celebrating women in finance—that the ARS market wasn’t all that it was portrayed to be.)
Today’s SEC release said that “TD Ameritrade's registered representatives told customers that ARS were an alternative to certificates of deposit and money market accounts, when in fact ARS were very different types of investments. Among other things, TD Ameritrade representatives did not tell customers about the complexity and risks of ARS, including their dependence on successful auctions for liquidity.”
The SEC previously announced finalized ARS settlements with Citigroup and UBS, Wachovia, Bank of America, RBC Capital Markets, and Deutsche Bank. The SEC's Division of Enforcement previously announced a settlement in principle with Merrill Lynch.
“TD Ameritrade is the latest in a series of landmark ARS settlements that bring unprecedented relief to tens of thousands of investors," said Robert Khuzami, Director of the SEC's Division of Enforcement. "ARS customers of numerous firms can get back all of the money they invested in auction rate securities as more than $50 billion in liquidity is being made available to them through these historic settlements."
"TD Ameritrade improperly marketed ARS to retail customers as short-term investments without telling them about the special risks of the ARS market," said Donald M. Hoerl, Regional Director of the SEC's Denver Regional Office. "This settlement provides hundreds of millions of dollars to thousands of TD Ameritrade customers who hold ARS that are now illiquid."
The SEC's order finds that TD Ameritrade willfully violated Section 17(a)(2) of the Securities Act of 1933. The Commission censured TD Ameritrade, ordered it to cease and desist from future violations, and reserved the right to seek a financial penalty against the firm.