FINRA Fines Closed-End Fund Distributor $3 Million for Misleading ARPS Marketing Materials
FINRA has fined the distributor of a closed end fund that issued auction rate preferred securities $3 Million for creating misleading marketing materials and failing to revise disclosures after obtaining knowledge that liquidity in the market had deteriorated. FINRA charges the marketing materials touted the ARPS as liquid investments and failed to disclose liquidity risks that ultimately came to pass.. FINRA also charges that the firm should have updated disclosures after becoming aware of red flags that the auction rate market had seized. FINRA noted that the distributor that created the marketing materials did not deal with the public but only with third party broker-dealers.
OUR TAKE: The only document that fully discloses all material information is the prospectus. Perhaps, fund distributors should re-consider whether to provide marketing materials directed for use by third parties. Also, shouldn’t the primary responsibility for determining disclosure rest with the selling broker-dealers?