Raymond James Financial announced Wednesday that it has reached a settlement with the Securities and Exchange Commission (SEC) and state regulators under which it will buy back about $300 million of illiquid auction-rate securities from retail customers.
The St. Petersburg, Fla.-based firm is one of the last ARS broker-dealers to reach a settlement agreement, resisting a buyback for years while other broker-dealer firms made amends with their ARS customers. In addition to settling with the SEC, the firm said it also had reached in-principle settlements with the North American Securities Administrators Association, the Florida Office of Financial Regulation and the Texas State Securities Board.
The firm, while neither admitting nor denying the allegations, will pay $1.75 million to the state regulators. No fine was announced with the SEC.
Raymond James said in a statement that it has reduced its clients’ ARS holdings from $2.1 billion in February 2008, when the auctions first failed, to $280 million this month.
The firm had resisted ARS settlements since January 2009 when it told investors that it did not have funds available to purchase about $1 billion of outstanding auction-rate securities. About $300 million of that was municipal ARS, the firm said at the time.
Raymond James has been under investigation for its ARS sales practices since at least January 2009 when it disclosed in a regulatory filing investigations by the SEC, the New York attorney general’s office and the Florida Office of Financial Regulation.
It’s unclear if the New York probe is continuing. A spokesman for Raymond James declined to comment beyond the firm’s press release.
The firm said it will have an estimated pretax charge of $50 million for the current quarter as a result of the buyback.
Regulators alleged that Raymond James misled investors about risks associated with ARS. The securities were marketed as “highly liquid” and “the same as cash,” according to Florida’s securities regulator. When broker-deal firms that were conducting the auctions abruptly stopped buying ARS for their own accounts, the auctions failed and the securities became illiquid.
Raymond James has 30 days to extend offers to buy back ARS from its retail customers, typically those with less than $10 million invested with the firm. Once all notifications have been sent out, the purchase-offer period will remain open for 75 days, according to the settlements.
The settlement requires Raymond James to fully reimburse any investors who sold ARS below par after the auctions failed. The firm must consent to an arbitration process to resolve claims of consequential damages suffered by individuals who were unable to access their funds. The firm must also reimburse investors who took out a loan from Raymond James because their ARS holdings were illiquid.
The firm has also agreed to make “best efforts” attempts to redeem ARS held by institutional investors.
More than $60 billion of ARS have been redeemed, according to the SEC and state regulators. Regulators in Florida and Texas said additional investigations may be continuing, but they declined to comment further during a conference call with reporters Wednesday.
Separately, Morgan Keegan & Co. announced Wednesday that it will complete its voluntary ARS buyback program by the third quarter of this year. The Memphis-based firm started the buybacks in early 2009, and it will have purchased about $2 billion of illiquid auction-rate securities from retail investors when it has finished the program, the firm said in a statement.