DOB: Stifel Nicolaus ARS Consent Order

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IN THE MATTER OF:

STIFEL, NICOLAUS &
COMPANY INCORPORATED

(CRD No. 793)

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CONSENT ORDER

DOCKET NO. CO-10-7809-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, Stifel, Nicolaus & Company Incorporated (“Stifel”), is a broker-dealer registered under the Act with its home office at 501 North Broadway, St. Louis, Missouri 63106;
 
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 Stifel to determine whether it had violated, was violating or was about to violate any provisions of the Act or Regulations (“Investigation”);
 
WHEREAS, a multistate task force led by the Securities Division of the Missouri Secretary of State (the “MSD”) conducted an investigation into Stifel’s marketing and sale of auction rate securities to investors during the period from January 1, 2006 through February 14, 2008;
 
WHEREAS, Stifel has advised the MSD of its agreement to resolve the multistate task force investigation relating to Stifel’s marketing and sale of auction rate securities to investors;
 
WHEREAS, Stifel agrees, inter alia, that it has voluntarily reimbursed or will voluntarily reimburse certain purchasers of auction rate securities, and that it would pay a total fine of Five Hundred Twenty Five Thousand Dollars ($525,000) to the jurisdictions represented by the multistate task force;
 
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 failed to reasonably supervise its agents;
 
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 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, Stifel, through its execution of this Consent Order, voluntarily waives 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 itself 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 its position in a hearing in which it 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

Stifel admits the jurisdiction of the Commissioner, neither admits nor denies the Findings of Fact and Conclusions of Law contained in this Consent Order, and consents to the entry of this Consent Order by the Commissioner.

IV. FINDINGS OF FACT

1. Auction rate securities are long-term debt or equity instruments that include auction preferred shares of closed-end funds, municipal auction rate bonds, and various asset-backed auction rate bonds (collectively referred to herein as “ARS”), with variable interest rates that reset through a bidding process known as a Dutch auction.
2.
At a Dutch auction, bidders generally state the number of ARS they wish to purchase and the minimum interest rate they are willing to accept.  Bids are ranked, from lowest to highest, according to the minimum interest rate each bidder is willing to accept.  The lowest interest rate required to sell all of the ARS at auction, known as the “clearing rate,” becomes the rate paid to all holders of that particular security until the next auction.  The process is then repeated, typically every seven, twenty-eight, or thirty-five days.
3.
While ARS are all long-term instruments, one significant feature of ARS (which historically provided the potential for short-term liquidity) is the interest/dividend reset through periodic auctions.  If an auction is successful (i.e., there are enough buyers for every ARS being offered for sale at the auction), investors are able to exit their positions at the auction.  If, however, auctions “fail” (i.e., there are not enough buyers for every ARS being offered for sale), investors are required to hold all or some of their ARS until the next successful auction in order to liquidate their funds.
4. Beginning in February 2008, the ARS market experienced widespread failed auctions.
5. Stifel and its Connecticut-registered securities agents (“Registered Agents”) sold ARS to Connecticut residents.
6. Stifel’s Registered Agents recommended ARS as safe and/or liquid investments, and compared ARS to cash alternatives, such as certificates of deposit or money market accounts.
7. Stifel did not formally train its Registered Agents regarding the risks and features of ARS.
8.
A number of Registered Agents did not sufficiently understand, and therefore did not adequately communicate to retail purchasers, the risks and features of ARS.

Stifel’s Failure to Supervise the Sale of ARS

9.
Stifel failed to reasonably supervise its Registered Agents, which constitutes a basis for initiating proceedings under Sections 36b-15(a) and 36b-27 of the Act.  Stifel failed to provide reasonable supervision by failing to provide pertinent information and comprehensive training to its Registered Agents and other sales and marketing staff regarding ARS and the mechanics of the auction process.

V. CONCLUSIONS OF LAW

10. The Commissioner has jurisdiction over this matter pursuant to the Act.
11.
The Commissioner finds that Stifel failed to reasonably supervise its agents, that this conduct violates Section 36b-31-6f(b) of the Regulations, and that grounds therefore exist to suspend or revoke Stifel’s registration under Section 36b-15(a) of the Act and/or to impose sanctions under Section 36b-27 of the Act.
12.
The Commissioner finds that this Consent Order and the following relief are appropriate, in the public interest, and consistent with the purposes fairly intended by the policies and provisions of the Act.

VI. REPRESENTATIONS AND CONDITIONS PRECEDENT

As conditions precedent to the entry of this Consent Order, Stifel, through its execution of this Consent Order, makes the following representations to the Commissioner:

1. In accordance with a Consent Order (the “Missouri Consent Order”) entered against Stifel by the Missouri Office of the Secretary of State on January 22, 2010 (Case No. AP-10-05), Stifel has or will retain, at its expense, an outside consultant (“Consultant”).  The scope of Consultant’s work is to conduct a review and make written recommendations concerning Stifel’s supervisory and compliance policies and procedures relating to the product review of nonconventional investments and the training, marketing and sale of nonconventional investments by Stifel and its Registered Agents throughout Stifel’s retail branch office system.  Stifel will receive a report prepared by the Consultant describing the Consultant’s recommendations and Stifel will provide to the MSD a copy of such report.  Stifel shall authorize the MSD to share these written reports with the Commissioner on a confidential basis to the extent allowed by law.  For a period of one (1) year following the conclusion of the Consultant’s work, Stifel and its affiliates may not employ or hire the Consultant in any capacity.
   
2.  In accordance with the Missouri Consent Order, Stifel shall, within fifteen (15) days of the end of each calendar quarter following the execution of the Missouri Consent Order, have provided to the Missouri Commissioner of Securities a written report describing and updating, in detail, all repurchase/buyback, issuer redemption and investor arbitration claims related to Eligible ARS that occur or continue to occur.  Where applicable, and in describing repurchase, redemption and arbitration developments or occurrences, Stifel shall have included investor or issuer names and states of residence and amounts of repurchases, redemptions and/or arbitration claims/awards.  Missouri shall be authorized to share these written reports with the Commissioner on a confidential basis to the extent allowed by law.
   
3. Stifel shall have modified its Voluntary Offer to Repurchase Eligible Auction Rate Securities at Par dated April 9, 2009 (the “Voluntary Offer”), the terms of which are incorporated by reference herein, for all Eligible Investors as described in paragraph 4 of these Conditions Precedent.  For purposes of this Consent Order, Eligible Investors shall be defined as investors who hold Eligible Accounts as that term is defined in the Voluntary Offer.  Except as specified in this Consent Order, all other terms and conditions of the Voluntary Offer shall remain in full force and effect and shall in no way be modified by this Consent Order.

4.

Stifel shall accelerate its repurchase of Eligible ARS from Eligible Investors who have accepted the Voluntary Offer as follows:

a.
January 2010 Repurchase

Stifel will have repurchased, at par, up to the greater of twenty-five thousand dollars ($25,000 of the remaining Eligible ARS holdings or ten percent (10%) of the remaining Eligible ARS holdings plus any accrued and unpaid interest or dividend of such amount no later than January 15, 2010.
    
b. December 2010 Repurchase
 
Stifel will repurchase, at par, up to the greater of twenty-five thousand dollars ($25,000) of the remaining Eligible ARS holdings or ten percent (10%) of the remaining Eligible ARS holdings plus any accrued and unpaid interest or dividend of such amount no later than December 31, 2010.
   
c. 2010 Supplemental Repurchase
 
Stifel will repurchase, at par, all of the Eligible ARS that remain after the December 2010 Repurchase from Eligible Investors who, as of January 1, 2009, maintained in an Eligible Account, Eligible ARS in an amount of one hundred fifty thousand dollars ($150,000) or less.  Such repurchase shall be completed no later than December 31, 2010. 
   
d. 2011 Repurchase
 
Stifel will repurchase, at par, all of the remaining Eligible ARS holdings plus any accrued and unpaid interest.  Such repurchase shall be completed no later than December 31, 2011.  Stifel will make its Voluntary Offer, as modified, to those Eligible Investors who have not previously accepted the Voluntary Offer.

5. Subject to applicable regulatory requirements and limitations, Stifel will cooperation with its bank affiliate to use its best efforts to make no-net-cost loans to Eligible Investors, provided such investors have demonstrated need for liquidity.
   
6.  Stifel elects to specifically forever release and hold harmless the State of Connecticut and its representatives and agents from any and all liability and claims arising out of, pertaining to, or relating to this matter. 

VII. CONSENT ORDER

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

IT IS HEREBY ORDERED THAT:

1.
This Consent Order concludes the investigation by the Commissioner and any other action against Stifel that the Commissioner could commence under the Act on behalf of Connecticut as it relates to Stifel’s marketing and sale of auction rate securities as described herein.  Specifically excluded from and not covered by this paragraph are any claims by the Commissioner arising from or relating to violations of the provisions contained in this Consent Order;
2.
This Consent Order is entered into solely for the purpose of resolving the multi-state investigation, and is not intended to be used for any other purpose.
3.
Stifel 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) calendar days following the entry of this Consent Order by the Commissioner, Stifel shall pay to the “Treasurer, State of Connecticut”, by certified bank check, electronic funds transfer or wire transfer, the sum of Eight Thousand Five Hundred Twelve and 73/100 ($8,512.73) as a fine.
5.
In the event another state securities regulator determines not to accept Stifel’s state settlement offer in connection with the multi-state investigation referenced herein, the total amount of the Connecticut payment shall not be affected, and shall remain at Eight Thousand Five Hundred Twelve and 73/100 Dollars ($8,512.73).
6.
To the extent that Stifel agrees to any subsequent settlement with any NASAA jurisdiction arising out of the above-referenced multistate investigation pertaining to Stifel’s marketing and sale of Eligible ARS to retail ARS investors as described herein, which includes a term or terms analogous to the terms herein which are more favorable to retail ARS 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 Connecticut retail ARS investors;
7. If Stifel defaults in any of its obligations set forth in this Consent Order, or fails to abide by its respective representations set forth herein, the Commissioner may vacate this Consent Order, at his sole discretion, upon ten (10) days notice to Stifel, and without opportunity for administrative hearing, or may pursue such enforcement measures as are appropriate under the circumstances.
8. This Consent Order is not intended to indicate that Stifel or any of its affiliates or current or former employees shall be subject 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’ securities laws, including any disqualifications from relying upon the registration exemptions or safe harbor provisions.  In addition, this Consent Order is not intended to form the basis for any such disqualifications.
9. This Consent Order shall not be construed as involving a finding that Stifel or any of its affiliates or current or former employees engaged in fraud.
10. 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 Stifel including, without limitation, the use of any e-mails or other documents of Stifel or of others for the marketing and sale of auction rate securities to investors, limit or create liability of Stifel, or limit or create defenses of Stifel to any claims.
11. This Consent Order shall not disqualify Stifel or any of its affiliates or current or former employees from any business that they otherwise are qualified or licensed to perform under applicable state law, or form the basis for any such disqualification.
12. Nothing herein shall preclude Connecticut, its departments, agencies, boards, commissions, authorities, political subdivisions and corporations (collectively, “State Entities”), other than the Commissioner and only to the extent set forth in paragraph 1 above, and the officers, agents or employees of 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 Stifel in connection with the marketing and sale of auction rate securities at Stifel.
13. Stifel shall pay its own costs and attorneys’ fees with respect to this matter.
14. Stifel shall not take any action or make or permit to be made any public statement creating the impression that Consent Order is without factual basis.  Nothing in this paragraph affects Stifel’s (a) testimonial obligations; (b) right to take legal or factual positions in defense of litigation or in defense of other legal proceedings in which the Commissioner is not a party; or (c) right to make public statements that are factual.

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 Stifel based upon a 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 Stifel and reflected herein are subsequently discovered to be untrue; and
3. This Consent Order shall become final when entered.


 
So ordered at Hartford, Connecticut      _______/s/_________
this 23rd day of September 2010.      Howard F. Pitkin 
    Banking Commissioner 


CONSENT TO ENTRY OF ORDER

I, Scott B. McCuaig, state on behalf of Stifel, Nicolaus & Company Incorporated, 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 Stifel, Nicolaus & Company Incorporated; that Stifel, Nicolaus & Company Incorporated agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Stifel, Nicolaus & Company Incorporated voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein.  Stifel, Nicolaus & Company Incorporated 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 Stifel, Nicolaus & Company Incorporated shall pay pursuant to the foregoing Consent Order.     

 
     Stifel, Nicolaus & Company Incorporated
  
           
By: ______/s/__________________
Name:  Scott B. McCuaig
  Title:  President

 
State of:  Missouri

City of:  St. Louis

On this the 20th day of September, 2010, before me, Karen L. Kehrer, the undersigned officer, personally appeared Scott B. McCuaig, who acknowledged himself/herself to be the President of Stifel, Nicolaus & Company Incorporated, a corporation, and that he/she, in such capacity, 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 President.
 
In witness whereof I hereunto set my hand.
 

_____/s/_____________________
Notary Public
Date Commission Expires: 12-3-13

  

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