WASHINGTON – Scottrade has agreed to pay $150,000 to settle Financial Industry Regulatory Authority charges that it did not identify bonds as callable in approximately 5,000 municipal securities transactions.
Additionally, Seattle-based EK Riley Investments and St. Louis-based Wells Fargo Advisors have agreed to separate FINRA settlements totaling $87,500 over charges that they traded below the minimum denomination in a total of 88 transactions.
Each of the firms accepted the settlements without admitting or denying FINRA's findings.
Shea Leordeanu, vice president of public relations with Scottrade, said that the firm "interacted with its clients with regard to the transactions at issue in an open and transparent manner," including several point of sale disclosures making clear the munis were callable.
"Each customer was required to acknowledge such disclosures before the purchase transaction could be completed," she said. "We have since resolved the confirmation issue addressed in the [settlement] by strengthening the necessary backend supervisory procedures."
Representatives for Wells Fargo and EK Riley could not be reached for comment.
FINRA found that Scottrade's actions took place from 2008 to early 2015 and involved roughly 1,500 customers. The munis in question were structured in a way that the issuer had the rights to "optional redemptions" or "special redemptions," triggered after a one-time extraordinary event that would have been specified in the bond contracts.
FINRA said the confirmation statements did not disclose the bonds were callable despite those redemption provisions, which violated Municipal Securities Rulemaking Board Rule G-15 on confirmations. Section "a" of G-15 requires a firm's confirmation statements to include a notation of "callable" if the securities are subject to call prior to maturity "by any means."
Scottrade also violated MSRB Rule G-27 on supervision because it did not have a system in place to ensure that its confirmations complied with Rule G-15.
EK Riley's $45,000 settlement with the self-regulator involved firm activity between April 4, 2014 and August 29, 2014. The firm settled over charges that it engaged in 49 transactions with 28 customers in amounts below the minimum denominations set by the issuer of the securities.
The minimum denomination for a bond is the lowest amount of the bond that can be bought or sold, as determined by the issuer in its official statement for the bonds. Issuers sometimes set higher minimum denominations on bonds that are risky to discourage retail investors from buying them.
Section "f" of MSRB Rule G-15 prohibits firms from engaging in transactions below the minimum denomination with two exceptions: if a dealer's purchase from a customer in a below-minimum amount represents a complete liquidation of the customer's position and if a dealer is selling below-minimum munis to a customer as a result of another customer liquidating his or her entire position.
FINRA found that EK Riley did not meet either exception in its 49 transactions. The self-regulator also charged the firm with violating G-27 because it did not enforce its written supervisory procedures that are designed to prevent below-minimum sales.
EK Riley contacted all customers involved in the below-minimum transactions and offered to liquidate the bonds they purchased. Wells Fargo agreed to pay $42,500 to settle similar charges of trading below established minimum denominations. In addition to the fine, FINRA also required that the firm offer customers the opportunity to revoke or cancel their transaction agreements.
Wells Fargo violated G-15's prohibition against such activity in 39 transactions with customers between Dec. 1, 2013 and Dec. 31, 2015, according to FINRA.
It also did not disclose to its customers that the transactions were in amounts below the minimum denomination for the bonds and that the bonds contained a resale restriction that could affect the liquidity of the customers' positions.
FINRA found that the failure constituted a violation of MSRB Rules G-17 on fair dealing and G-47 on time of trade disclosure. The conduct triggered both rules because such a violation fell under Rule G-17 prior to July 5, 2014 and under G-47 thereafter.
