WASHINGTON – Dougherty & Co. was hit with the largest Financial Industry Regulatory Authority fine of its kind in recent years after the firm agreed to pay $50,000 for serving as an underwriter for 54 issuers with which it had ongoing "blanket" financial advisory agreements.
The Minneapolis-based firm agreed to settle one of the largest violations of Municipal Securities Rulemaking Board Rule G-23 on the activities of financial advisors without admitting or denying FINRA's findings. Representatives for Dougherty could not be reached for comment.
"This was the largest fine of the last few years in regard to G-23 and the largest action in terms of scope of its kind," a FINRA spokesperson said. The spokesperson added the self-regulator has brought a number of actions related to G-23 violations in the past.
However, several market participants said they thought the fine was way too low given the large scope of the violations.
Rule G-23 is designed to avoid the conflict of interest that would exist if a muni securities professional were to act as both a municipal advisor and underwriter on the same issue, according to the MSRB. An MA has a fiduciary duty to the issuer. However, an underwriter's primary role is to purchase or arrange for the placement of securities in an arms-length transaction with the issuer and underwriter.
According to Rule G-23, a dealer that has a municipal advisory relationship with an issuer is prohibited from acquiring any portion of an issue from that client either directly or indirectly. A dealer has a municipal or financial advisory relationship with an issuer when the firm enters into an agreement with the issuer to provide financial advisory services with respect to the issuance of municipal securities, according to the rule. The relationship includes advice with respect to structure, timing, and terms of the bond issue.
FINRA, which also censured the firm, found that Dougherty's violations occurred between Nov. 27, 2011 and Jan. 3, 2014. The firm's advisory agreements did not contain limitations on the time they would be in effect or the specific issuances they would cover. Instead, they listed Dougherty's financial advisory obligations as encompassing all "projects that require the issuance of obligations," FINRA said.
Dougherty's responsibilities included recommending the type or types of bonds to be utilized, assisting in determining the amount of financing required and recommending financing or refinancing programs to fit the issuers' resources and requirements. The terms of the agreements said the firm would receive a fee for each bond issue on which it provided advisory services, according to FINRA.
The self-regulator found that the firm was only compensated as an underwriter for the issuances it carried out with the 54 issuers during the review period.
The Securities and Exchange Commission recently brought a somewhat similar, first-of-its-kind fiduciary duty case against Central States Capital Markets, a Kansas-based municipal advisory firm, and three of the firm's employees. The commission found that the firm and its employees breached their fiduciary duty to their client after serving as financial advisor for the unidentified issuer in a muni transaction and selecting a broker-dealer where the employees also worked, to underwrite the bonds.
The SEC found the firm and individuals violated Rule G-23 as well as MSRB Rule G-17 on fair dealing.
