Opinion ID: 799254
Heading Depth: 2
Heading Rank: 3

Heading: 2006 SEC Investigation of Morgan Keegan's Intervention in ARS Auctions

Text: In 2006 (prior to this 2009 action), the SEC investigated the ARS underwriting and auction procedures of Morgan Keegan and other broker-dealers. Ultimately, the SEC issued a May 31, 2006 cease-and-desist order against Morgan Keegan and several other broker-dealers. See In re Bear, Stearns & Co., et al., Securities Act Release No. 8684, Exchange Act Release No. 53888, 88 SEC Docket 259 (May 31, 2006). The SEC charged each of the broker-dealers, including Morgan Keegan, with violating § 17(a)(2) of the Securities Act by engaging in improper ARS auction practices. In settling the SEC's administrative charges, the broker-dealers consented to the issuance of a cease-and-desist order, censure, and payment of a civil fine. The May 31, 2006 cease-and-desist order states that the broker-dealers, or at least some of them, committed the following violative practices: (1) completing open or market bids, which allowed the broker-dealer to designate some of the bid's parameters and which advantaged the investors submitting open or market bids by displacing other investors' bids; (2) without proper disclosure, intervening in auctions to prevent failed auctions or to set a market rate; (3) prioritizing certain customers' bids to increase the likelihood that those bids would be filled; (4) submitting or revising bids after auction deadlines; (5) improperly allocating ARS to investors who bid at the clearing rate instead of allocating them pro rata, as stated in the disclosure documents; (6) in oversubscribed auctions, not requiring certain customers to purchase the pro rata share of ARS for which they had bid, even though the bids were supposed to be irrevocable; (7) providing certain customers with returns above the auction clearing rate based on an express or tacit understanding reached prior to or during an auction; and (8) providing different price talk to certain investors, giving those investors an advantage in determining what rate to bid. Id. at 5-6. In a footnote, the SEC specifically noted that it was not prohibiting broker-dealers from bidding for their own accounts if proper disclosures were made. In the cease-and-desist order, each broker-dealer agreed to provide all of its current ARS customers and the ARS issuers with a written description of the [broker-dealer's] material auction practices and procedures. Id. at 8. Additionally, each broker-dealer agreed to provide all first-time ARS purchasers with a written description of the broker-dealer's material auction practices and procedures. Id. The cease-and-desist order allows a broker-dealer to fulfill this notice requirement as to first-time ARS purchasers by including a written notification with the trade confirmation, that a written description of the [broker-dealer's] material auction practices and procedures is available on a specified web page of the [broker-dealer's] website accessible to those first-time purchasers. Id. (emphasis added). This written notification with the trade confirmation (1) must be set forth prominently in such a manner as to call it to the attention of the reader and (2) must state that a written description of the broker-dealer's material auction practices and procedures will be sent to the purchaser upon request. Id.