The self-regulator also ordered five other firms — Coastal Securities Inc. in Houston, Fifth Third Securities Inc. in Cincinnati, as well as Guggenheim Securities LLC, the Williams Capital Group LP, and the Winchester Group Inc., which are based in New York — to pay a total of $151,670 for pricing and muni trade reporting violations.
The firms neither admitted nor denied FINRA’s findings but agreed to the sanctions. Their officials either declined to comment or could not be reached.
FINRA said UBS violated the Municipal Securities Rulemaking Board’s Rule G-27 on supervision by allowing an unidentified, former high-producing broker in California with high-net-worth clients to excessively cross-trade muni securities in customer accounts from November 2004 through September 2006.
Cross-trading occurs when a broker buys and sells securities between customers at prices he or she sets that are not necessarily based on market prices. Often the broker collects fees on both sides of the trade and the customers do not benefit, and can even suffer losses.
In the UBS case, the broker solicited both sides of trades of munis between customers even though the munis were intended to be held for the long term. The broker engaged in frequent short-term transactions, or “in-and-out” trading, that provided the broker and UBS with compensation, but resulted in losses to certain customers.
FINRA found UBS lacked adequate policies and procedures to monitor this type of trading.
Further, the firm’s auditors and compliance officials flagged the broker’s trading for investigation, but did not take steps to address it during the two-year period, FINRA said.
UBS compliance bulletins said, “At least one side of the cross transaction must result from a bona fide unsolicited customer order” and financial advisors “may solicit both sides of a cross transaction if such a cross would be beneficial to both clients.” But UBS did not provide any guidance on how to determine whether a trade would be beneficial.
FINRA fined Fifth Third Securities $77,500 and ordered it to pay $18,822 plus interest in restitution for: selling munis to customers from its own account in eight transactions at unfair prices; failing to report 42 muni trades with accurate information or on a timely basis; and failing to keep accurate data in memorandum of the 42 trades.
In an example of unfair pricing, the firm was ordered to pay $5,470 in restitution to a customer after selling him $80,000 of bonds issued by the Indiana Health and Educational Facility Financing Authority for 75.026 in early 2009.
The self-regulator said the firm violated MSRB Rules G-17 on fair dealing, G-30 on prices, G-14 on trade reporting, and G-8 on books and records.
FINRA fined Williams Capital $29,000 for violating G-14 and G-27. The case focused on dozens of muni trades that occurred in 2010.
According to FINRA, some of the muni trades were not reported within 15 minutes of execution as required, some were reported with an incorrect time of trade, and some should not have been reported at all.
The self-regulator also said the firm’s supervisory system was not reasonably designed to achieve compliance with muni rules for trade reporting.
FINRA fined Coastal Securities $10,000 and ordered it to pay $9,848 plus interest in restitution to customers for charging excessive markups when selling them thinly traded charter school bonds that it had purchased at much lower prices. The markups ranged from 8.39% to 16.32%, FINRA said.
Guggenheim Securities was fined $13,500 for muni trade reporting, books and records, and supervisory violations. FINRA said between April 1, 2009, and June 30, 2009, the firm failed to report data for 37 trades on a timely basis, failed to report the correct time of trade to the MSRB and in memorandum, and was unable to show it performed supervisory reviews of the trade reporting.
The Winchester Group was fined $10,000 for violating G-14 and G-8 by failing to report data from 10 of 60 muni trades within 15 minutes as required and failing to capture and record accurate execution times for 52 of 60 muni trades done from Feb. 11, 2008, through July 25, 2010.