FINRA raised another $5 million for customers who purchased auction rate securities.  This time, the offending broker-dealers were SunTrust Robinson Humphrey and SunTrust Investment Services, who agreed to pay combined fines of $5mn. SunTrust RH, which underwrote the ARS's, will pay $4.6mn for allegedly:  (i) failing to adequately disclose the increased risk that auctions could fail;  (ii) sharing material non-public information;  (iii) using sales material that did not adequately disclose the risks associated with ARS;  and, (iv) having inadequate supervisory procedures and training concerning the sales and marketing of ARS. SunTrust IS will pay $400K for allegedly having deficient ARS sales material, procedures and training. Detaied FINRA Allegations. Beginning in late summer 2007, SunTrust RH became aware of stresses in the ARS market that raised the risk that auctions might fail.  At the same time, SunTrust RH was told by its parent, SunTrust Bank, to reduce its use of the bank's capital and to begin examining whether it had the financial capability to support all ARS's in which it acted as the sole or lead broker-dealer, should in there be a major market disruption. The stresses increased, yet the firm failed to adequately disclose the increased risk to its sales reps.  It continued, however, to encourage them to sell SunTrust RH-led ARS issues so as to reduce the firm's inventory.  And so, certain SunTrust RH sales reps continued to push these ARS's as safe and liquid. In February 2008, SunTrust RH stopped supporting ARS auctions, knowing that those auctions would fail and the ARS would become illiquid. FINRA also found that on 2/13/08, SunTrust RH shared material non-public information regarding the potential refinancing of certain ARS issues with SunTrust Bank, which was contemplating investing in ARS's.  This information was material because SunTrust Bank was assured that if the auction market froze, it would likely be able to dispose of the illiquid ARS on the date the ARS was refinanced. In addition, both companies used advertising and marketing materials that were not fair and balanced, and they did not provide a sound basis for evaluating all the facts about purchasing ARS.  Specifically: the materials did not contain adequate disclosure of all the risks of ARS, including adequately disclosing the risk that ARS auctions could fail.  This rendered the investments illiquid for substantial periods of time.  Both firms failed to maintain adequate supervisory procedures and training concerning their sales and marketing of ARS. Voluntary ARS Repurchases. SunTrust RH and SunTrust IS voluntarily repurchased approximately $381 million and $262 million of ARS's, respectively, from their customers after FINRA began its investigation.  As part of the settlements, the firms also agreed to participate in a special FINRA-administered arbitration program for eligible investors to resolve investor claims for consequential damages. FINRA Staff Credits.   Investigation conducted by Michael Choi, James Ruppert, Erin Lynch;  supervised by Jim Day, Enforcement Chief Counsel and AVP.  [FINRA New Release, 7/26/11] For further details, go to:   [SunTrust Robinson Humphrey AWC 2008013864101]   [SunTrust Investment Services AWC 2008016036101]