WASHINGTON – The Financial Industry Regulatory Authority has censured and fined Edward Jones $200,000 for misrepresenting customers' taxable interest as tax-exempt and failing to adequately monitor its supervisory systems meant to address short positions in municipal bonds.
In addition, New York-based Stoever, Glass & Company, Inc. was fined $40,000 after FINRA found the firm sold municipal securities below the minimum denominations set forth in bond documents.
Both firms settled with FINRA without admitting or denying the self-regulator's findings. John Boul, a spokesperson for Edward Jones said the firm's only comment is that it cooperated fully with FINRA in resolving the investigation. A representative from Stoever Glass said the firm did not have a comment.
The actions were announced as part of FINRA's March disciplinary report.
FINRA found that between June 2009 and December 2014, St. Louis-based Edward Jones inaccurately represented to its customers that at least $129,624 in interest the firm paid from short positions of munis was tax-exempt. The firm, which dropped its negotiated public finance underwriting business at the beginning of this year, had procedures that were meant to give guidance on dealing with short positions and the interest to be paid from them. However, FINRA found Edward Jones had about 244 short positions, mainly from trading errors, during the several-year period, some of which were not covered for more than a year.
Short positions in munis occur when firms sell bonds that they do not own. The dealer that executes the short sale must then go to the market and subsequently purchase the securities from a third party in order to deliver on the transaction. When a short position corresponds to a customer's "long" position, the dealer makes a substitute interest payment to the customer. However, because the firm is paying the interest, the customer must pay taxes on that money.
In early 2014, Edward Jones began reviewing its procedures for short positions and in September 2014 revised its policies for preventing and covering short positions. FINRA found the firm was able to substantially decrease the number of short positions it had by the end of 2014 and that it had revised its written procedures in April 2015 to include the policy changes.
Additionally, the firm has agreed to reimburse any effected customers for costs from tax liabilities or amending tax filings.
FINRA charged Edward Jones with violating Municipal Securities Rulemaking Board Rule G-27 on supervision, G-17 on fair dealing, and G-8 on books and records.
The self-regulator has brought a number of similar actions against firms over short positions in the past, including a $675,000 fine against two divisions in Morgan Stanley last April, a $750,000 fine against UBS in August, and a $225,000 fine against Oppenheimer & Co. in February.
In the other case, FINRA found that Stoever Glass, between December 11, 2013 and April 15, 2014, recommended and sold two municipal bonds in 14 transactions to retail customers in amounts lower than the $100,000 minimum denomination. The official statement for one of the bonds specified it could only be sold to qualified institutional buyers.
The actions violated MSRB Rule G-15(f), which prohibits transactions below the minimum denomination, G-17, G-19 on making suitable recommendations to customers, and G-27(b) on supervisory systems, according to FINRA.
