Regulators to inspect brokers on securities

Security industry regulators are planning a large scale inspection of 40 brokerage firms starting next week to examine their practices of selling auction-rate securities.

The Financial Industry Regulatory Authority has sent letters to the firms requesting in-depth documentation of their practices related to auction-rate securities, and will have inspectors at the brokerages over next week, and the week of Sept. 8, according to a person who was briefed on the regulator's plan.

The industry regulator is conducting the sweep while government investigators continue a national probe of firms involved in the $330 billion auction-rate securities. Auction-rate securities are the debt of nonprofits, municipalities and certain investment funds.

Most were sold to investors as safe, cash-like investments. But the trading market for the securities abruptly seized in February because of the credit crisis, leaving many investors stuck with investments they cannot unload.

The firms being targeted by FINRA include regional and small brokers, and brokers affiliated with banks and insurance companies, the source said. International firms are also included. The sweep will entail agents making visits to the firms to review records, in order to expedite the investigation, the source said.

The sweep is focused on firms that have large amounts of auction-rate securities customer accounts and that have drawn a significant number of investor complaints. The news was first reported by Bloomberg.

So far, six firms have agreed to buy back more than $50 billion in auction-rate securities from investors, in settlements with state and federal regulators.