WASHINGTON — Goldman Sachs & Co. has agreed to pay $50,000 to settle Financial Industry Regulatory Authority charges that it submitted inaccurate auction rate securities information to a reporting system and did not have a supervisory system in place to catch the problems.
FINRA found that between Jan. 1, 2009 and Dec. 31, 2011, New York City-based Goldman, while acting as a program dealer, erroneously said its rates for approximately 1,000 auction rate securities were determined at auction when instead they were set at the maximum interest rates allowed for the securities. Goldman submitted the inaccurate information to the Municipal Securities Rulemaking Board's Short-term Obligation Rate Transparency System (SHORT), according to the settlement.
The firm's misrepresentations constituted violations of MSRB Rule G-34 on market information requirements. Goldman agreed to pay a $20,000 fine based on those findings. It paid another $30,000 because FINRA found its supervisory system was not set up to adequately ensure the firm was in compliance with relevant securities rules. Those findings led FINRA to conclude that Goldman had violated MSRB Rule G-27 on supervision.
The firm neither admitted nor denied the findings but a Goldman spokesperson said the firm is "pleased to have resolved the matter."
The self-regulator said that, in sanctioning the firm, it took into account that Goldman reported the violations to FINRA's market enforcement staff after conducting a review of its SHORT system submissions. Also Goldman took action to correct the problems.
Auction rate securities are long-term investments with interest rates that are frequently reset through auctions. The auctions typically occur in 7, 14, 28, or 35-day intervals. Entities such as municipalities, student loan authorities, and museums generally issue auction rate securities.
Auctions to determine the interest rate rely on enough participation from both sellers and potential buyers. If an auction works properly, investors already holding the securities will request to sell their securities, hold their existing position at a specified interest rate, or hold their securities at whatever the new interest rate the auction establishes, according to FINRA.
The potential buyers then inform specified dealers how much of the security they want to buy and at what interest rate they would like to do so. The bids and buy orders with the lowest interest rates are filled first, followed by those with higher rates until all the securities available for purchase are sold. The highest interest rate accepted is called the "clearing rate" and is the rate for the security until the next auction.
Auctions fail when there are too many sellers compared to buyers. When this happens, current investors hold their securities and receive a maximum interest rate drawn from the security's offering document. A failed auction could be one reason Goldman used a maximum rate instead of an auction rate in the securities FINRA cited.
Goldman was one of multiple firms to pay a $1.5 million penalty in a separate settlement with the SEC in 2006 over findings that the firms did not disclose to customers the role they were playing to ensure securities auctions did not fail.
