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Securities Law

FINRA Fines 3 Firms $40,000 for Muni Violations

WASHINGTON — The Financial Industry Regulatory Authority has fined three Chicago-based firms a total of $40,000 for violations of muni trade reporting and other rules.

The sanctions and violations were detailed in FINRA's latest monthly disciplinary report.

FINRA fined Newedge USA, LLC $20,000, David A. Noyes & Co. $15,000, and North Star Investment Services $5,000 for muni rule violations. The firms neither admitted nor denied the findings, but consented to the sanctions.

Officials and spokesmen for the firms either declined to comment or could not be reached for comment.

According to FINRA, Newedge, from Jan. 1, 2010 through Dec. 31, 2010 failed to report yields and other key information in 366 muni trades, constituting 95.8% of all the muni trades it reported to the Municipal Securities Rulemaking Board's Real-time Transaction Reporting System at this time.

The reporting failures violated MSRB Rule G-14 on reports of sales and purchases.

FINRA also said the firm's supervisory system was not reasonably designed to provide compliance with the MSRB's rules, a violation of Rule G-27 on supervision.

The self-regulator said that $15,000 of the fine was for violating the trade rule and $5,000 for the supervisory rule.

The David A. Noyes firm was fined for failing to report to the RTRS the yield or the "yield-to-worse" factoring in the sales charges for muni transactions. It also was fined for supervisory failures.

The MSRB generally requires dealers to take sales charges into account when calculating the yield, officials there said. In addition, dealers generally are required, when calculating the yield on a transaction, to report the lower of the yield-to-maturity or the yield-to -the-first-optional-call-date. FINRA seems to be suggesting the firm did not do this or take or take sales charges into account.

Failing to include sales charges in yield calculations leaves customers thinking they are receiving higher total returns they are, MSRB officials said.

From July 1, 2009 through Sept. 30, 2009, the firm failed to report the yield, factoring in the sales charges, in 56 trades, 4.75% of the 1,178 trades reported to the RTRS during that period, FINRA said. The firm also failed to report the correct yield of four trades.

In addition, the firm failed to disclose the yield-to-worst factoring in sales charges to customers in five transactions, violating Rule G-15 on confirmation, clearance and settlement and uniform practice requirements with respect to transactions with customers.

FINRA also said the firm's supervisory system was faulty.

The fines for the violations were $7,500 for G-14, $2,500 for G-15, and $5,000 for G-27.

FINRA said it only fined North Star Investment Services $10,000, $5,000 of which were for muni rule violations, after taking into account its revenues and financial resources.

From Oct. 1, 2010 through Dec. 31, 2010, the firm failed to report 45 or 45 muni trades with correct execution times, FINRA said. On two of the trades, the firm reported it was acting as an agent when it was acting as a principal.

One trade was reported 17 minutes late, and another was a minute late. Thirty-six of the trades were reported with other incorrect information, FINRA said.

In addition, the firm's time stamp machine was eight minutes fast, the firm failed to maintain street-side tickets for 22 principal transactions and one order ticket contained incorrect information. These failures violated MSRB Rule G-8 on books and records and SEC Rule 17a-3, FINRA said.

The self-regulator also found the firm's supervisory system to be inadequate to comply with muni rules.

FINRA also fined the firm for violating its rules in connection with inaccurate reporting of information from corporate bond trades.

In a state or corrective action, the firm said it had adopted numerous reforms to rectify its compliance problems.

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