FINRA Fines 5 Firms, One Person for MSRB Rule Violations

The Financial Industry Regulatory Authority has censured and fined five firms and one individual a total of $152,500, primarily for Municipal Securities Rulemaking Board rule violations, the largest of which is a $50,000 fine against New York-based Royal Alliance Associates Inc., according to disciplinary actions released late last week.

FINRA also filed a complaint against a Birmingham-based broker-dealer, Aura Financial Services Inc., for allegedly recommending unsuitable municipal and other investments to four customers, three of whom lost their investments.

FINRA's complaint against Aura, its former principal Jonathan Fenton, as well as two other representatives of the firm, alleges that they recommended and effected the purchase of investments in hedge funds without having reasonable grounds for believing that the recommendations and subsequent transactions were suitable for public customers.

The complaint also alleges that the firm, acting through its president, failed to reasonably supervise the sale of hedge fund investments by Fenton and another representative, and that it failed to require their registered representative to review compliance materials annually or failed to provide documentation confirming that the representative had satisfied that FINRA requirement.

In addition, the complaint alleges that the firm failed to accurately report muni transactions to the MSRB, as well as corporate transactions to FINRA.

A FINRA spokesman said that the matter has yet to be adjudicated and that the self-regulator plans to investigate further. John Woodruff, the firm's chief compliance officer, declined to comment on the complaint but noted that Fenton is no longer with the firm.

FINRA found that Royal Alliance, as well its principal Michael P. Contillo, violated MSRB rules G-17 on fair dealing, G-27 on supervision, G-30 on prices and commissions, and G-3 on classification of representatives.

FINRA fined the firm $10,000 for unfair pricing violations, $25,000 for supervision failures in connection with its muni transactions, and $15,000 for failing to ensure that Contillo was properly registered. It also ordered the firm to pay $2,767 in restitution plus interest to certain customers who paid or received unfair prices on securities bought or sold through the firm between April 1 and June 30, 2004. FINRA fined Contillo $10,000 for executing muni trades without being properly registered to do so. Officials at the firm declined to comment.

FINRA fined Phoenix-based Cue Financial Group $45,000 for failing to report municipal securities and corporate transactions in a timely manner. Specifically, the authority said that the firm failed to report in a timely manner 15 of 24 muni transactions between Jan. 1 and March 15, 2006.

The late transactions were reported between two and seven hours after the time of trade. The MSRB's Rule G-14 on real-time transaction reporting requires dealers to report most muni transactions within 15 minutes of their execution. FINRA also said the firm violated MSRB Rule G-8 on record keeping and Rule G-27.

Cue officials did not return phone calls seeking comment.

The self-regulator fined Little Rock-based Crews & Associates $27,500 after it bought or sold munis at unfair prices for its customers in 14 instances between July 1, 2003, and March 31, 2004. FINRA also cited lax supervisory procedures and said that between Feb. 1 and March 31, 2005, the firm failed to properly report information regarding 914 muni purchase and sale transactions.

A company spokesman said the firm has made being fully complaint with FINRA rules its "highest priority."

Meanwhile, FINRA fined two firms, St. Petersburg, Fla.-based American Municipal Securities Inc. and Livingston, N.J.-based the GMS Group LLC, $10,000 each for various muni rule violations.

FINRA found that between Sept. 1 and Nov. 30, 2003, American failed to show the correct time of entry on the memorandum of 49 brokerage orders, in violation of MSRB Rule G-8 and a Securities and Exchange Commission rule. The firm also failed to report in a timely manner 71 muni transactions in violation of Rule G-14, the self-regulator said.

John Petagna, the firm's president, acknowledged the mistakes but said the firm has taken steps to make sure they are not repeated.

Separately, FINRA said that GMS, in four instances between Jan. 1, 2004, and June 30, 2005, bought or sold munis at unfair prices for its customers, with markups of between 4% and 9%, in violation of rules G-17 and G-30. The self-regulator also faulted the firm's supervisory system, which it said did not provide for supervision "reasonably designed" to comply with FINRA and MSRB rules.

GMS' $10,000 fine consisted of $5,000 for the G-17 and G-30 violations and $5,000 for deficient supervisory procedures. The firm also was ordered to provide $2,336.87 in restitution, plus interest, to certain customers.

In a corrective action statement, the firm said it has taken multiple steps to resolve the rule violations, specifically with respect to monitoring and detecting potential pricing mark-up or mark-down irregularities.

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