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 untradeable products.
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.