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Nuveen Fined $3 Million Over Marketing of Preferred Shares

Nuveen Investments Inc., the largest manager of closed-end funds, was fined $3 million by the Financial Industry Regulatory Authority for misleading customers on the safety of auction-rate securities before the market for those investments collapsed in February 2008.

The Chicago-based company “failed to adequately disclose liquidity risks” for auction-rate preferred shares issued by its closed-end funds in marketing material used by brokers to sell the securities, the self-regulatory body known as Finra said in a statement today.

“Nuveen was aware of the facts that raised significant red flags about the ability of investors to obtain liquidity for their Nuveen auction-rate securities yet failed to revise their marketing brochures,” Brad Bennett, Finra’s chief of enforcement, said in the statement.

Closed-end funds used to sell preferred shares on the auction-rate market to increase the amount of money they could invest by as much as 50 percent, boosting returns for common shareholders. Preferred-share investors treated the securities as a highly liquid alternative to money-market funds until the market collapsed during the early stages of the credit crisis. The events left preferred shareholders unable to sell.

Redeemed $14.2 Billion

Regulators forced eight broker-dealers, including Citigroup Inc. and UBS AG, to buy back about $45 billion of auction-rate securities. Some auction-rate bonds and preferred shares remain frozen.

Nuveen’s funds had $15.4 billion in preferred shares outstanding when the market crumbled. The company has since redeemed $14.2 billion, freeing those investors by selling alternate forms of debt or preferred shares to replace leverage provided by the frozen shares.

“We are pleased to put this matter behind us so that we can continue to focus our efforts on refinancing the Nuveen closed-end funds’ remaining auction-rate preferred shares,” Kathleen Cardoza, a Nuveen spokeswoman, said in a separate statement.

The company, along with New York’s BlackRock Inc. and Calamos Asset Management Inc. in Naperville, Illinois, was sued in 2010 by investors for allegedly harming common shareholders through those refinancing moves.

Nuveen, owned by Chicago-based private-equity firm Madison Dearborn Partners LLC, “neither admits to nor denies Finra’s allegations,” the company said its statement.

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