Securities Law

FINRA's Muni Fines Top $6M in 2012, Restitution Climbs to $2M

WASHINGTON — The Financial Industry Regulatory Authority ordered securities firms and individuals to pay fines of more than $6.1 million for municipal market rule violations in disciplinary cases reported in 2012, 6% less than the $6.6 million in muni fines ordered in actions reported the previous year, according to an analysis by The Bond Buyer.

Though fines declined year-over-year, restitution amounts nearly tripled to $2 million during the most recent period, up from $747,600 the previous year.

In both years, the bulk of the total dollar amount of fines and nearly all the restitution were related to alleged violations of the MSRB's Rule G-17 on fair dealing. But violations of Rule G-14 on trade reporting occurred most often.

The Bond Buyer reviewed 2011 and 2012 disciplinary reports, which are released around the 15th of every month, and Letters of Acceptance, Waiver and Consent, in which firms agreed to sanctions but did not admit or deny wrongdoing. Typically the letters, made available through the reports, had been signed by firms a few months earlier and the misconduct had occurred from several months to several years earlier.

Because these reports include only sanctions in which fines were more than $10,000, The Bond Buyer requested complete sanction data from FINRA. A spokesperson for the self-regulator said that information was not available.

Reports from 2012 showed that 56 firms and individuals agreed to 60 muni-related sanctions during the period. The average fine per sanction was $102,390 and the average restitution was $125,800. However, those average amounts were skewed by four sanctions of more than $100,000 and three of more than $1 million.

Excluding those, the average fine per letter of acceptance, waiver and consent during the 2012 period was $24,750 and the average restitution was $9,254.

That's in line with reports from the previous year, which showed that 64 firms and individuals agreed to 65 sanctions for muni-related violations. Average fines during that period were roughly $101,057. Excluding 11 cases in which sanctions were $100,000 or more, the average fine per sanction in 2011 was $21,319 and the average restitution was $11,354.

The $8.2 million in muni-related fines and restitution reported in 2012 make up roughly 8.04% of the $102 million in total fines and restitution FINRA ordered against all securities firms during the year.

But the dollar amount of muni fines do not appear proportionate to the size of the muni market, which had $3.7 trillion of debt outstanding in 2011.

By comparison, the corporate debt market had $8.2 trillion in outstanding debt in 2011, according to data compiled by the Securities Industry and Financial Markets Association, and the U.S. equity market had market capitalization of $15.6 trillion in 2011, according to data from the World Federation of Exchanges.

FINRA spokespersons said they were unable to break out the fines based on different securities or financial products. But based on the available figures for the size of the markets and fines from FINRA reports, the muni market makes up 13.36% of the combined muni, corporate debt and equity markets, but accounts for only 8.04% of the fines.

FINRA's guidelines say its sanctions are intended to prevent recurrence of misconduct and that fines for repeat offenders may be more severe than for first-time violators. When issuing sanctions, FINRA considers a firm or individual's disciplinary history, its cooperation with the investigation and whether the violations were intentional or concealed.

FINRA also considers if preventative measures have been taken and if the firm or individual already compensated customers.

In 2012, roughly 80%, or $4.9 million, of the fines were levied against 18 firms and one individual for violations of Rule G-17. Though the average of those fines was $234,600, at least two major cases skew the numbers.

One was against five Manhattan-based firms that agreed to pay a total of $4.5 million in sanctions — including fines of $3.4 million and restitution of $1.1 million — for being reimbursed for fees paid to the California Public Securities Association out of municipal bond proceeds.

The firms were Citigroup Global Markets, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Goldman, Sachs & Co., Morgan Stanley & Co. and J.P. Morgan Securities LLC.

The other was against Syosset, N.Y.-based David Lerner Associates, which agreed to pay fines of $1.2 million and restitution of $765,300 million for charging excessive markups and markdowns on municipal bonds, and related violations. FINRA found that the markups ranged from 3.01% to 5.78%.

David Lerner's head trader William Mason also agreed to pay a $100,000 fine and was suspended from the industry for six months.

In the 2011 reports, FINRA ordered 23 firms and two individuals to pay fines of $4.2 million for G-17-related violations, 64% of the period's total fines. FINRA also ordered those firms and individuals to pay $737,800 in restitution.

There were several large G-17 cases that year, including one against SunTrust Robinson Humphrey Inc., which agreed in June 2011 to pay $2.4 million for failing to disclose to customers risks associated with auction-rate securities, for advertisements that were not fair and balanced and for supervisory failures.

Also in 2011, FINRA fined Jefferies & Co. and two staffers to pay a total $672,500 for fair-dealing violations involving auction-rate securities, including failure to disclose conflicts of interest. FINRA also ordered the firm to repay to customers $425,000 in fees and commissions.

The most frequent fines in both years were for violations of Rule G-14, which specifies how firms must report trades to the MSRB's Real-time Transaction Reporting System, and associated violations of Rule G-8, which requires firms to keep accurate trade memoranda.

FINRA fined 58 firms a total of roughly $1.1 million in both years for those violations. The average fine was roughly $19,509.

The majority of those firms, 46, were cited for failing to report trades to RTRS within 15 minutes of execution.

Firms also failed to report the correct yield and time of trade to RTRS and made other reporting errors.

During the two-year period, FINRA sanctioned 60 firms and individuals for inadequate supervisory procedures, a violation of Rule G-27.

While most G-27 fines were $5,000 or $7,500 and were only made public because they were associated with other fines that totaled more than $10,000, some firms paid far more.

The January 2011 report includes a case against Merrill Lynch, Pierce, Fenner & Smith Inc., which agreed to pay $500,000 for having inadequate 529-plan supervisory procedures. FINRA said the firm's procedures did not ensure staffers considered customers' state income tax benefits when evaluating 529 plan suitability.

Another firm, UBS Financial Services Inc., agreed to pay $300,000 in fines in 2011 for failing to supervise a trader who solicited bids on both sides of transactions, a practice called "cross-trading," over a two-year period.

Some firms were sanctioned for the same violations multiple times.

In early 2011, FINRA accepted a settlement in which Morgan Keegan & Co. agreed to pay a $5,000 fine for violating Rule G-14's trade reporting requirements

Then in 2012, the firm agreed to pay an additional $22,500 for G-14 violations in 2012, plus $12,500 for violations of Rule G-8, G-27 and G-15 on confirmation, clearance and settlement practices.

Likewise, in May 2012 Charles Schwab & Co. agreed to pay $35,000 for G-14 violations that occurred in 2010. The fines included $20,000 for failing to file reports within 15 minutes of execution and $15,000 for reporting incorrect yields to RTRS. A year earlier, in May 2011, the firm agreed to pay $12,500 for failing to report trades within 15 minutes. That misconduct occurred during the first quarter of 2009.




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