On Feb. 9, FINRA sent a Wells Notice to the online brokerage E*Trade that
said it may soon pursue an enforcement action against the company over
the sale of auction-rate securities (“E*Trade faces FINRA action
over auction-rate sales,” Reuters, Feb. 23, 2011). E*Trade announced
the receipt of the notice in an annual report recently filed with the SEC.
E*Trade’s securities customers currently hold approximately $138
million in auction-rate securities, according to the article. FINRA is
considering action based on “alleged violations” in the sale
of those securities.
The securities, which were marketed to investors as liquid cash-equivalents
with the returns of longer-term debt products, have been the cause of
numerous FINRA actions and arbitration claims since the market froze in
2007. When Wall Street banks decided to stop holding the auctions where
the securities were bought and sold, investors were stuck holding the
As reported in the article, over the past three years, federal and state
regulators have required many of the securities’ underwriters (such
as UBS and AG) to repurchase millions of dollars of illiquid auction-rate
securities from investors. In 2010, regulators began to bring enforcement
actions against secondary brokerage firms as well, many of which have
since settled and agreed to repurchase the securities.