Brokerages face inspections tied to sales of auction-rate debt
- United States
- 08/25/2008
U.S. regulators will start on-site inspections next week of about 40 brokerages involved in sales of auction-rate securities, stepping up a nationwide inquiry into whether the firms failed to warn clients the market was collapsing, a person familiar with the matter said.
The Financial Industry Regulator Authority, which regulates almost 5,100 brokerages, wrote to the firms this month seeking detailed records, said the person, who reviewed the letters. New York Attorney General Andrew Cuomo said yesterday he had subpoenaed firms including Fidelity Investments, Charles Schwab Corp. and Oppenheimer Holdings Inc. in a parallel probe.
Financial regulators are shifting the focus to brokerages that sold the securities from banks that created them after wringing pledges from five Wall Street firms, including Citigroup Inc. and UBS AG, to repurchase about $35 billion of auction-rate debt. Like Cuomo, Finra has uncovered evidence that firms improperly sold the instruments, the person said.
“If downstream brokerages deliberately stuck their heads in the sand but continued to actively market these products to unknowing investors, that will certainly be relevant to our calculus of our firms’ culpability,” Cuomo’s office said in a letter to the Regional Bond Dealers Association yesterday.
State and federal regulators, including the Securities and Exchange Commission, are looking at how brokerages sold auction- rate securities before the $330 billion market collapsed in February. That’s when firms running the periodic auctions for the debt abandoned their routine role as buyers of last resort, leaving investors stuck with securities they couldn’t sell.
