The Financial Industry Regulatory Authority today fined SunTrust Robinson Humphrey Inc. $4.6 million and SunTrust Investment Services Inc. $400,000 for violations related to the sale of auction rate securities, officials said.

SunTrust RH, which underwrote the ARS sale, was fined $4.6 million for failing to adequately disclose the increased risk that auctions could fail, sharing material non-public information, using sales material that did not adequately disclose the risks associated with ARS, and having inadequate supervisory procedures and training of the sales and marketing of ARS.

SunTrust IS was fined $400,000 for having deficient ARS sales material, procedures and training, Finra officials said.

SunTrust RH in late summer 2007 became aware of stresses in the ARS market that raised the risk that auctions might fail, Finra officials said. At the same time, SunTrust RH was told by parent SunTrust Bank to reduce use of the bank's capital and determine whether it could financially support all ARS as the sole or lead market broker-dealer if a major market disruption occurred.

As stresses increased, Finra said Sun Trust RH failed to adequately disclose the increased risk to its sales representatives, while encouraging them to sell SunTrust RH-led ARS issues in order to reduce the firm's inventory.

As a result, certain SunTrust RH sales representatives continued to sell the ARS as safe and liquid. In February 2008, SunTrust RH stopped supporting ARS auctions, knowing that they would fail and the ARS would become illiquid.

Finra determined that both firms failed to maintain adequate supervisory procedures and training concerning their sales and marketing of ARS.

Finra's action concludes agreements in principle previously announced in Sept. 2008 and withdrawn in May 2009.

SunTrust RH and SunTrust IS voluntarily repurchased approximately $381 million and $262 million of ARS, respectively, from their customers after Finra began its investigation. In addition, as part of the settlements, the firms will participate in a special Finra-administered arbitration program to resolve investor claims for consequential damages

-Jim McConville