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Univ. of Toledo College of Law

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Wednesday, July 9, 2008

FINRA Staff Provides Interpretation of Notice Regarding Partial Redemptions of ARS

FINRA issued a staff interpretive memo regarding NASD Rule 2110 and NYSE Rule 402.30—Partial Redemption Allocations and Disclosure Practices in Auction Rate Securities, to clarify questions about its recently issued Regulatory Notice 08-21 (the Notice), in which FINRA provided guidance to its members on partial redemptions of auction rate securities.  In response to current market conditions, some issuers are offering partial redemptions of auction rate securities, raising questions about the precise allocation methodologies that might be acceptable under NASD Rule 2110 and NYSE Rule 402.30.

FINRA set out in the Notice the requirements of the respective governing rules. Where a member firm is considering the adoption of an allocation process that diverges from the express provisions of NYSE Rule 402.30, but such methodology is believed to comport with the principles set forth in the Notice—including that no customers are disadvantaged—given the exigencies of the partial redemptions in these particular securities, the member firm should contact its FINRA Coordinator for a determination that such methodology will be acceptable.

In addition, FINRA notes that, when dealing with investors who hold securities that have become illiquid (such as auction rate securities that are experiencing failed auctions), NASD Rule 2110 requires that firms must provide fair and balanced communications pertaining to material matters related to such securities, including allocation methodologies in the case of redemptions and calls. FINRA provides some examples of possible methods of such communications.

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