FINRA Sets Precedent With Fines

WASHINGTON — The Financial Industry Regulatory Authority has fined three firms and an individual, who was also suspended, for municipal rule violations, including for a precedent-setting case of improperly seeking reimbursement from issuers for excessive expenses on bond rating trips.

The muni-related fines total $63,000.

FINRA slapped Alabama-based Gardnyr Michael Capital, Inc. with a total of $20,000 of fines for violations of Municipal Securities Rulemaking Board Rules G-17 on fair dealing and G-27 on supervision for charging trip expenses to issuers and for receiving reimbursement for other expenses the firm was contractually obligated to pay. GMCI's sole owner and president Pfilip Gardnyr Hunt, Jr. received a $10,000 fine and suspension from association with any FINRA member in any principal capacity for three business days. Hunt is also the firm's secretary, treasurer, director and until recently, its chief compliance officer. The firm was also ordered to pay restitution to the issuers for the reimbursements, which totaled nearly $8,000.

"This case presents for the first time the question of whether it is a violation of MSRB Rule G-17 for a municipal securities firm to obtain reimbursement for certain costs incurred by municipal officials and firm representatives on bond rating trips," states the decision by FINRA's hearing panel.

The complaint focuses on three trips to New York that took place in December 2007, March 2008, and December 2009. FINRA examiners found that on these trips GMCI executives and sometimes members of their families spent thousands of dollars not necessary to the business of meeting with rating agencies and then got the issuers to foot the bill.

The firm contends that FINRA examiners are applying a "novel" interpretation to G-17, that these reimbursements are standard practice in the industry, and that the county governments involved knowingly approved the repayments. FINRA's enforcement division argues that the practice was still dishonest, regardless of whether it is commonplace in the industry.

The hearing panel dismissed two of five charges that the firm violated G-17 in connection with obtaining reimbursements for entertainment changes. But it held the firm accountable for the other charges, which involved reimbursements for food, lodging and transportation, and said Hunt failed to have a supervisory system in place to prevent such violations. The panel rejected the argument that established industry practices, like arriving in New York early and billing those costs back to the issuer, cannot be violations.

"Even if other municipal securities firms routinely schedule and pay for extra days on rating trips, their practice does not excuse GMCI," the decision reads. "It is well-settled that a member's improper conduct is not excused because others in the industry do likewise."

GMCI and Hunt have the right to appeal the hearing panel decision to the National Adjudicatory Council, which is made up of individuals in the securities business and non-industry representatives. Unless FINRA's Board of Governors decides to review the NAC decision, it is FINRA's final action in the matter. But they can appeal FINRA's ruling to the Securities and Exchange Commission and then to a federal court.

Huntington Investment Company, based in Columbus, Ohio, agreed to a fine of $25,000 for failures to disclose information to the MSRB in violation of Rules G-32 on primary offering disclosure, G-27, and G-37 on political contributions.

FINRA found that between March 28, 2011 and Jan. 30, 2012, the firm failed to disclose via EMMA that there would be no preliminary or final official statements for a bond anticipation note offering and failed to file advance refunding documents. It also failed to have written policies in procedures in place to prevent these violations, and failed to disclose several political contributions of several thousand dollars made by an executive at the firm. The non-MFP executive contributed to $2,400 to Ohio Treasurer Josh Mandel and $1,000 to Ohio Gov. John Kasich, according to amended G-37 forms.

Tejas Securities Group Inc., an Austin, Tex. based broker-dealer, accepted a fine of $8,000 for failing to properly report and record muni securities transactions as required by Rules G-14 on trade reporting and G-8 on books and records. Between July 1, and Sept. 30, 2010, the firm failed to report 30 transactions within 15 minutes of the time of trade, and also failed to show the correct time of execution on the memorandum of 23 brokerage orders.

Huntington and Tejas agreed to the penalties without accepting or denying FINRA's findings. Neither responded to requests for comment. GMCI could not be reached for comment on whether it will appeal the FINRA hearing panel decision.

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