FINRA fined Nuveen Investments, LLC, of Chicago, $3 million for creating misleading marketing materials used in sales of Auction Rate Preferred Securities ("ARPS").

Nuveen Funds' ARPS were a form of ARS - i.e., long-term securities with interest rates or dividend yields that are reset periodically through an auction process.  Contrary to other ARS types, Nuveen ARPS were preferred shares issued by closed end mutual funds to raise money for the funds to invest.

By early 2008, retail investors had purchased over $15 billion of Nuveen Funds' ARPS.  The investments were offered and sold only by 3rd-party broker-dealers.  Nuveen Investments served as distributor for Nuveen Funds and, in that role, created marketing brochures for use by B/D's who made the sales to retail customers.  The brochures were the primary sales and marketing material Nuveen created for these ARPS's.

    FINRA's Findings.   FINRA found the following alleged violations and deficiencies regarding brochures - in hard copy and on the Internet: 

• they failed to adequately disclose liquidity risks for ARPS.
• they failed to disclose the risks that ARPS auctions could fail, causing the investments to become illiquid and preventing customers from having access to their invested funds for a period of time should the auctions fail.
• they provided misleading statements, instead, that described the ARPS as safe and liquid investments. 
• Nuveen's supervisory procedures failed to ensure full and accurate description of features and risks.

    Nuveen Fails to Disclose Significant Event.   Upon learning in early January 2008 that a lead auction manager, responsible for about $2.5bn of the ARPS's, intended to stop managing Nuveen auctions, Nuveen failed to revise disclosures in their brochures.  On 1/22/08, the lead manager didn't submit support bids in an auction for the securities, which caused the auction to fail.  Nor was Nuveen able to find a replacement for the lead manager. 

The auction failure and Nuveen's inability to find a replacement manager raised serious questions about whether Nuveen's ARPS investors would be able to obtain liquidity for the securities in future auctions.  Despite this, Nuveen did not revise its marketing brochures for these new risks and, thus, were misleading.  In February 2008, widespread auction failures occurred throughout the ARS market, including auctions for Nuveen funds ARPS.

To date, the Nuveen funds have redeemed all but $1.2bn of the $15.4 billion of ARPS's that were outstanding on 2/12/09.  As part of its settlement of FINRA charges, Nuveen agreed to use its best efforts to effect redemptions of any remaining outstanding Nuveen funds ARPS.  

For further details and to access the AWC, go to:   [FINRA News Release, 5/23/11]