DOB: Banc of America Securities - ARS Consent Order

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IN THE MATTER OF:

BANC OF AMERICA
SECURITIES LLC

(CRD No. 26091)

BANC OF AMERICA INVESTMENT
SERVICES, INC.

(CRD No. 16361)

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CONSENT ORDER

DOCKET NO. CO-10-7787-S

I. PRELIMINARY STATEMENT

WHEREAS, the Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the General Statutes of Connecticut, the Connecticut Uniform Securities Act (“Act”), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies promulgated under the Act (“Regulations”);
 
WHEREAS, Banc of America Investment Services, Inc. (“BAI”) was previously registered as a broker-dealer under the Act;
 
WHEREAS, Banc of America Securities LLC (“BAS”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (CRD number 7691) (“MLPF&S”) are currently registered as broker-dealers under the Act;
 
WHEREAS, BAS, BAI and MLPF&S (in its capacity as successor by merger to BAI) are referred to collectively hereinafter as “Respondents”;
 
WHEREAS, on October 23, 2009, BAI merged with MLPF&S;
 
WHEREAS, it is in the interest of the parties to this Consent Order to address only pre-merger conduct and customers of BAI;
 
WHEREAS, the Commissioner, through the Securities and Business Investments Division of the Department of Banking (“Division”), conducted an investigation pursuant to Section 36b-26(a) of the Act into the activities of BAS and BAI to determine whether they, or either of them, had violated, were violating or were about to violate any provisions of the Act or Regulations (“Investigation”);
 
WHEREAS, coordinated investigations into the activities of BAS and BAI in connection with certain of their sales practices regarding the underwriting, marketing, and sale of Auction Rate Securities (“ARS”) during the period from approximately August 1, 2007 through February 11, 2008 have been conducted by a multistate task force composed of members of the North American Securities Administrators Association, Inc. (“NASAA”);
 
WHEREAS, Respondents have cooperated with regulators conducting the investigations by responding to inquiries, providing documentary evidence and other materials, and providing regulators with access to facts relating to the investigations;
 
WHEREAS, Respondents have advised regulators of their agreement to resolve the investigations relating to their practices in connection with the underwriting, marketing, and sale of ARS;
 
WHEREAS, Respondents entered into a Settlement Term Sheet (“Settlement”) with NASAA, which in turn recommended to NASAA members certain settlement terms intended to resolve the investigation into the marketing and sale of ARS by Respondents;
 
WHEREAS, pursuant to the Settlement, Respondents agreed, inter alia, to reimburse certain purchasers of ARS and pay a total fine of Fifty Million Dollars ($50,000,000) to those states and territories entering administrative or civil consent orders approving the terms of the Settlement;
 
WHEREAS, Respondents and the Commissioner wish to resolve those issues in accordance with the terms of the Settlement and without the expense and delay that formal administrative proceedings would involve;
 
WHEREAS, Section 36b-15(a) of the Act authorizes the Commissioner to revoke any registration if, inter alia, the Commissioner finds that (1) the order is in the public interest, and (2) the registrant has violated the Act, or any regulation or order under the Act, has failed reasonably to supervise its agents or has engaged in dishonest or unethical practices in the securities business;
 
WHEREAS, Section 36b-27(a) of the Act authorizes the Commissioner to order any person who has violated, is violating or is about to violate any provision of the Act or any regulation, rule or order adopted or issued under the Act to cease and desist from such violation;
 
WHEREAS, Section 36b-27(d) of the Act authorizes the Commissioner to impose a fine of up to One Hundred Thousand Dollars ($100,000) per violation against any person who has violated any provision of the Act or any regulation, rule or order adopted or issued under the Act;
 
WHEREAS, Section 36b-31(a) of the Act provides, in relevant part, that “[t]he commissioner may from time to time make . . . such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-33, inclusive”;
 
WHEREAS, Section 36b-31(b) of the Act provides, in relevant part, that “[n]o . . . order may be made . . . unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-33, inclusive”;
 
WHEREAS, an administrative proceeding initiated under Sections 36b-15 and 36b-27 of the Act would constitute a “contested case” within the meaning of Section 4-166(2) of the General Statutes of Connecticut;
 
WHEREAS, Section 4-177(c) of the General Statutes of Connecticut and Section 36a-1-55(a) of the Regulations of Connecticut State Agencies provide that a contested case may be resolved by consent order, unless precluded by law;

II. CONSENT TO WAIVER OF PROCEDURAL RIGHTS

WHEREAS, the Respondents, through their execution of this Consent Order, each voluntarily waive the following rights:

1.
To be afforded notice and an opportunity for a hearing within the meaning of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177(a) of the General Statutes of Connecticut;
2.
To present evidence and argument and to otherwise avail themselves of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177c(a) of the General Statutes of Connecticut;
3. To present their respective positions in a hearing in which each is represented by counsel;
4. To have a written record of the hearing made and a written decision issued by a hearing officer; and
5. To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order;

NOW THEREFORE, the Commissioner, as administrator of the Act, hereby enters this Consent Order.

III. JURISDICTION AND CONSENT TO ENTRY OF CONSENT ORDER

The Respondents admit the jurisdiction of the Commissioner, neither admit nor deny the Findings of Fact and Conclusions of Law contained in this Consent Order that relate to their respective conduct, and consent to the entry of this Consent Order by the Commissioner.

IV. FINDINGS OF FACT

1. Beginning in March 2008, the task force began its investigation of the underwriting, marketing, and sale of ARS by BAS and BAI.
2.
In or about August and September 2007, some ARS auctions experienced failures.  These failures were primarily based on credit quality concerns related to the ARS at issue, which often involved underlying assets of collateralized debt obligations.
3.
During the fall of 2007 and into the beginning months of 2008, as the default rates on subprime mortgages soared and the market in general began experiencing significant credit tightening, monoline insurers that insured many issuances of ARS were also becoming distressed and were at risk of ratings downgrades.
4. The result of the overall market conditions in the fall of 2007 and into the beginning of 2008 resulted in increasing concerns regarding market liquidity, as well as a declining demand for ARS.
5. The task force concluded that BAS and BAI should have had knowledge that, during the fall of 2007 and winter of 2008, the auction markets were not functioning properly and were at increased risk for failure.
6. During that time period, significant numbers of buyers had been exiting the market and the continued success of the auctions was reliant upon the lead broker-dealers, such as BAS, making increased support bids.  These support bids had the effect of artificially propping up the market and creating the illusion that the auction rate market was functioning as normal.
7. However, during that time, BAS and BAI continued to market and sell ARS without informing customers of the heightened risks associated with holding these securities.
8.
Instead, BAS and BAI engaged in a concerted effort to market ARS underwritten by BAS towards its large retail customer accounts without advising the retail customers of any of the potential risks associated with a failed auction or market illiquidity.
9. On or about February 11, 2008, without notifying any of its customers, BAS stopped broadly supporting the auctions for which BAS was lead broker-dealer.
10. The decision left thousands of BAS and BAI customers holding illiquid ARS.
11. On or about September 10, 2008, BAS, BAI, Bank of America Corporation (“BAC”), and Blue Ridge Investments, L.L.C. (“Blue Ridge”) agreed, in principle, that BAC would cause Blue Ridge to buy back, at par plus accrued but unpaid interest or dividends, ARS for which auctions were in failed mode from “Eligible Investors,” which included all individual investors, all charitable organizations with account values up to Twenty-five Million Dollars ($25,000,000) and small and medium sized businesses with account values up to Ten Million Dollars ($10,000,000) who purchased ARS from BAS and BAI.

V. CONDITIONS PRECEDENT TO ENTRY OF CONSENT ORDER

As conditions precedent to the entry of this Consent Order, Respondents represent, through their execution of this Consent Order, that they have complied with the following:

Definitions.

1. For purposes of this Consent Order and these Conditions Precedent, the following terms shall have the meanings specified:

a.   
“Eligible ARS” means ARS purchased from BAS and BAI on or before February 13, 2008 that were subject to an auction failure on or after February 11, 2008.
b.
“Eligible Investors” shall mean (1) Natural persons (including their IRA accounts, testamentary trust and estate accounts, custodian UGMA and UTMA accounts, and guardianship accounts) who purchased Eligible ARS from BAS and BAI; (2) Charities, endowments, or foundations with Internal Revenue Code Section 501(c)(3) status that purchased Eligible ARS from BAS and BAI and that had Twenty-five Million Dollars ($25,000,000) or less in assets in their accounts with BAS and BAI as determined by the customer’s aggregate household position(s) at BAS and BAI as of September 9, 2008; or (3) a Small Business that purchased Eligible ARS from BAS and BAI.  For purposes of this provision, “Small Business” shall mean BAS and BAI customers not otherwise covered in subparagraphs (1) and (2) of this paragraph that had Fifteen Million Dollars ($15,000,000) or less in assets in their accounts with BAS and BAI as of September 9, 2008.

Conditions Precedent

1.
Eligible Investors

As of October 21, 2008, BAC shall have caused Blue Ridge to offer to buy back, at par plus accrued and unpaid interest or dividends, Eligible ARS for which auctions were in failed mode from Eligible Investors who purchased such Eligible ARS from BAS and BAI prior to February 13, 2008 (the “Offer”).  The Offer remained open for a period between October 10, 2008, and December 1, 2009, subject to extension by Blue Ridge.
 
BAS and BAI provided prompt notice to customers of the settlement terms, and BAS and BAI established a dedicated telephone assistance line, with appropriate staffing, to respond to questions from customers concerning the terms of the settlement.
2.
Relief for Eligible Investors Who Sold Below Par

As of December 31, 2008, BAS and BAI provided notice to any Eligible Investor that BAS and BAI could reasonably identify, who sold Eligible ARS below par between February 11, 2008, and September 22, 2008.  Such investors were paid the difference by BAS and BAI between par and the price at which the Eligible Investor sold the Eligible ARS.  Any such Eligible Investors identified after December 31, 2008, were or will be promptly paid the difference between par and the price at which the Eligible Investors sold the Eligible ARS.
3.
Consequential Damages Claims

As of October 10, 2008, BAS and BAI made reasonable efforts to notify those Eligible Investors who own Eligible ARS that, pursuant to the terms of the multistate settlement, an independent arbitrator, under the auspices of the Financial Industry Regulatory Authority (“FINRA”) would be available for the exclusive purpose of arbitrating any Eligible Investor’s consequential damages claim.
 
BAS and BAI consented to participate in the NASAA Special Arbitration Procedure (“SAP”) established specifically for arbitrating claims arising out of an Eligible Investor’s inability to sell Eligible ARS.  The arbitrations would be governed by the procedures described below.  BAS and BAI notified Eligible Investors of the terms of the SAP.  Nothing in this Consent Order shall serve to limit or expand any party’s rights or obligations as provided under the SAP. Arbitration would be conducted, at the customer’s election, by a single non-industry arbitrator and Respondents would pay all forum and filing fees.
 
Arbitrations asserting consequential damages of less than One Million Dollars ($1,000,000) would be decided through a single chair-qualified public arbitrator who would be appointed through the FINRA list selection process for single arbitrator cases.  In arbitrations where the consequential damages claimed equal or exceed One Million Dollars ($1,000,000), the parties could, by mutual agreement, expand the panel to include three public arbitrators who would be appointed through FINRA’s list procedure.
 
Any Eligible Investors choosing to pursue such claims through the SAP would bear the burden of proving that they suffered consequential damages and that such damages were caused by their inability to access funds invested in Eligible ARS.  In the SAP, Respondents would be able to defend themselves against such claims; provided, however, that Respondents would not contest liability for the illiquidity of the underlying ARS position or use as part of their defense any decision by an Eligible Investor not to borrow money from BAS or BAI.
 
All customers, including but not limited to Eligible Investors who avail or availed themselves of the relief described in this Consent Order, could pursue any remedies against Respondents available under the law.  However, Eligible Investors that elect or elected to utilize the SAP would be limited to the remedies available in that process and could not bring or pursue a claim relating to Eligible ARS in another forum.
4.
Institutional Investors

Respondents endeavored and will continue to endeavor to work with issuers and other interested parties, including regulatory and governmental entities, to expeditiously and on a best efforts basis provide liquidity solutions for institutional investors that purchased Eligible ARS from BAS and BAI and were not entitled to participate in the buyback described in Paragraph 1 of the Conditions Precedent section of this Consent Order (“Institutional Investors”).
 
Beginning December 31, 2008, Respondents submitted written reports to a representative specified by NASAA, outlining the efforts in which Respondents engaged, and the results of those efforts, with respect to Institutional Investors’ holdings in Eligible ARS.  The written reports were submitted through January 20, 2010, and Respondents made themselves available to confer with the representative specified by NASAA no less frequently than quarterly to discuss Respondents’ progress to date.
5.
Relief for Municipal Issuers

Respondents refunded refinancing fees to municipal auction rate issuers that issued such securities through BAS and BAI in the initial primary market between August 1, 2007, and February 11, 2008, and refinanced those securities through BAS and BAI after February 11, 2008.  Refinancing fees are those fees paid to BAS and BAI in connection with a refinancing and are exclusive of legal fees and any other fees or costs not paid to BAS and BAI in connection with the transaction.
6. Repayment of Interest on Loans Provided To Eligible Investors

To the extent that BAS and BAI loaned money to Eligible Investors secured by Eligible ARS after February 11, 2008, at an interest rate that was higher than that paid on such Eligible ARS, Respondents refunded or shall refund the difference to such Eligible Investors.

VI. CONCLUSIONS OF LAW

1.
The Commissioner has jurisdiction over this matter pursuant to the Act.
2.
As described in the Findings of Fact, BAS and BAI, in violation of Section 36b-31-6f(b) of the Regulations, failed reasonably to supervise their agents with respect to the marketing and sale of ARS from October 1, 2007 to February 11, 2008.  Such conduct constitutes a basis for 1) revocation proceedings under Section 36b-15(a)(2)(K) of the Act; and 2) the entry of a cease and desist order and the imposition of an administrative fine under subsections (a) and (d) of Section 36b-27 of the Act.
3. As described in the Findings of Fact, BAS and BAI inappropriately marketed and sold ARS without adequately informing their customers of the increased risks of illiquidity associated with the product for the time period August 1, 2007 through February 11, 2008.  Such conduct constitutes a dishonest and unethical practice within the meaning of Sections 36b-4 and 36b-15(a)(2)(H) of the Act.  Such conduct constitutes a basis for 1) revocation proceedings under Section 36b-15(a)(2)(H) of the Act; and 2) initiating administrative proceedings under subsections (a) and (d) of Section 36b-27 of the Act.
4. The Commissioner finds that this Consent Order and the relief described herein are appropriate, in the public interest, and consistent with the purposes fairly intended by the policies and provisions of the Act.

VII. CONSENT ORDER

On the basis of the Findings of Fact, Conclusions of Law, and Respondents’ consent to the entry of this Consent Order,

IT IS HEREBY ORDERED THAT:

1.
This Consent Order concludes the investigation by the Division and any other action that the Division could commence under the Act on behalf of Connecticut as it relates to Respondents’ underwriting, marketing, and/or sales of auction rate securities as described herein, provided however, that excluded from and not covered by this paragraph 1 are any claims by the Commissioner arising from or relating to the Consent Order provisions contained herein.
2.
This Consent Order is entered into solely for the purpose of resolving the referenced multistate investigation, and is not intended to be used for any other purpose.
3.
Respondents shall CEASE AND DESIST from violating the Act or any regulation or order under the Act, and shall comply with the Act, its regulations and any order under the Act.
4.
Within ten (10) days after the entry of this Consent Order by the Commissioner, BAS and BAI shall jointly and severally pay the total sum of Eight Hundred Sixty-five Thousand Two Hundred Ninety and 80/100 Dollars ($865,290.80) to the “Treasurer, State of Connecticut” by electronic funds transfer or wire transfer as a fine.
5.
In the event another state securities regulator determines not to accept the state settlement offer relating to Respondents in connection with the multistate investigation referenced herein, the total amount of the Connecticut payment shall not be affected, and shall remain at the amounts set forth in paragraph 4 above.
6.
To the extent that either BAS or BAI agrees to any subsequent settlement with any NASAA jurisdiction arising out of the above referenced coordinated investigations by the multistate task force pertaining to BAS or BAI’s respective marketing and sale of Eligible ARS to Eligible Investors as described herein, which includes a term or terms analogous to the terms herein which are more favorable to Eligible Investors in such NASAA jurisdiction than those terms identified herein, the subsequent more favorable settlement term or terms shall, upon the Commissioner’s request, be incorporated by reference into this Consent Order and become equally applicable to Eligible Investors in Connecticut.
7. If payment is not made by one or more of the Respondents as required in this Consent Order, or if one or more of the Respondents defaults in any of its other obligations set forth in this Consent Order, the Commissioner may vacate this Consent Order as to the defaulting Respondent, in the Commissioner’s sole discretion, upon ten (10) days notice to the defaulting Respondent, and without opportunity for administrative hearing, and/or may pursue appropriate enforcement measures against the defaulting Respondent under the Act.
8. This Consent Order as entered by the Commissioner waives any disqualifications contained in the Act or the Regulations thereunder, including any disqualifications from relying upon the registration exemptions or safe harbor provisions to which Respondents or any of their affiliates may be subject as a result of the findings contained in this Consent Order.  This Consent Order also is not intended to subject Respondents or any of their affiliates to any disqualifications contained in the federal securities laws, the rules and regulations thereunder, the rules and regulations of self regulatory organizations or various states’ or U.S. Territories’ securities laws, including, without limitation, any disqualifications from relying upon the registration exemptions or safe harbor provisions under those laws.  In addition, this Consent Order is not intended to form the basis for any such disqualifications.
9. For any person or entity not a party to this Consent Order, this Consent Order does not limit or create any private rights or remedies against the Respondents, including, without limitation, the use of any e-mails or other documents of Respondents or of others for auction rate securities sales practices, limit or create liability of the Respondents, or limit or create defenses of or for the Respondents to any claims.
10. Nothing herein shall preclude the State of Connecticut, its departments, agencies, boards, commissions, authorities, political subdivisions and corporations (collectively “State Entities”), other than the Commissioner in his administration of the Act and then only to the extent set forth in paragraph 1 above, and the officers, agents or employees of the State Entities from asserting any claims, causes of action, or applications for compensatory, nominal and/or punitive damages, administrative, civil, criminal, or injunctive relief against the Respondents in connection with the Respondents’ auction rate securities sales practices.
11. This Consent Order and any dispute related thereto shall be construed and enforced in accordance with, and governed by, the laws of Connecticut without regard to any choice of law principles.
12. This Consent Order shall be binding upon Respondents and each of their successors and assigns with respect to all conduct subject to the provisions above and all future obligations, responsibilities, undertakings, commitments, limitations, restrictions, events, and conditions.

NOW THEREFORE, the Commissioner enters the following:

1. The Findings of Fact, Conclusions of Law and Consent Order set forth above, be and are hereby entered;
2. Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against a Respondent or its successors in interest based upon that Respondent’s violation of this Consent Order or the matters underlying its entry, if the Commissioner determines that compliance with the terms herein is not being observed or if any representations made by the affected Respondent and set forth herein are subsequently discovered to be untrue; and
3. This Consent Order shall become final when entered.


 
So ordered at Hartford, Connecticut      _______/s/_________
this 9th day of July 2010.      Howard F. Pitkin 
    Banking Commissioner 


CONSENT TO ENTRY OF ORDER

I, Steve Chaiken, state on behalf of Banc of America Securities LLC, that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Banc of America Securities LLC; that Banc of America Securities LLC agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Banc of America Securities LLC voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein.  Banc of America Securities LLC further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any administrative monetary penalty that Banc of America Securities LLC shall pay pursuant to the foregoing Consent Order.     

 
     BANC OF AMERICA SECURITIES LLC
  
           
By: __________ /s/__________________
Name:  Steve Chaiken
  Title:   Managing Director 

 
State of:  New York

County of:  Nassau

On this the 1st day of July, 2010, before me, Elizabeth M. Coppolo, the undersigned officer, personally appeared Steve Chaiken, who acknowledged himself/herself to be the Managing Director of Banc of America Securities LLC, a limited liability company, and that he/she, as such Managing Director, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the limited liability company by himself/herself as Managing Director.
 
In witness whereof I hereunto set my hand.


______/s/____________________________
Notary Public
Date Commission Expires:  Oct. 12, 2013
 

CONSENT TO ENTRY OF ORDER

I, David Futterman, state on behalf of Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) as successor by merger to Banc of America Investment Services, Inc. (“BAI”), that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Merrill Lynch as successor by merger to BAI; that Merrill Lynch, as successor by merger to BAI, agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Merrill Lynch, as successor by merger to BAI, voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein.  Merrill Lynch, as successor by merger to BAI further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any administrative monetary penalty that Merrill Lynch shall pay, as successor by merger to BAI, pursuant to the foregoing Consent Order.     

 
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
as successor by merger to
     BANC OF AMERICA INVESTMENT SERVICES, INC.
  
           
By: ______/s/__________________
Name:  David Futterman
  Title:   Assoc. General Counsel 

 
State of:  New York

County of:  Nassau

On this the 6th day of July, 2010, before me, Elizabeth M. Coppolo, the undersigned officer, personally appeared David Futterman, who acknowledged himself/herself to be the Associate General Counsel of Merrill Lynch, Pierce, Fenner & Smith Incorporated, a corporation, and that he/she, as such Associate General Counsel, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself/herself as Associate General Counsel.
 
In witness whereof I hereunto set my hand.
 

_____/s/__________________________
Notary Public
Date Commission Expires:  Oct. 12, 2013


  

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