J.P. Morgan, Santander Pay $575,000 to Settle Separate FINRA Charges

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WASHINGTON – FMSbonds Inc., Santander Securities, and J.P. Morgan Securities will pay a total of $785,307 to settle municipal bond rule violations with the Financial Industry Regulatory Authority for selling bonds below the minimum denominations, charging customers unfair prices, and failing to properly report trades.

Additionally, Texas-based Investment Professionals, Inc. agreed to a $125,000 fine over charges that it artificially inflated the price of some munis it sold and Missouri-based L.J. Hart and Co. will pay a $9,500 fine for allowing an individual who was neither qualified nor licensed to act as a municipal securities representative to work as a municipal securities representative at the firm.

Each of the firms settled without admitting or denying FINRA's findings. Most firms either could not be reached for comment or declined to comment.

James Klotz, president of FMSbonds, said "there's no question that we had some technical violations of the minimum denomination rule." But he noted that "80% of those violations were involving bonds that were either investment grade-rated or a short."

"Sometimes the connotations for that rule is that people understand it to be that these are bonds that were below investment grade or speculative and that wasn't the case," Klotz said.

FINRA found that from Aug. 1, 2013 through Dec. 31, 2015, Florida-based FMSbonds engaged in 170 customer transactions in munis in amounts that were lower than the stated minimum denomination for the issue and did not qualify for an exemption under Municipal Securities Rulemaking Board Rule G-15. 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.

FMSbonds also did not disclose all material facts about 51 muni transactions because it didn't inform its customers that the transactions were in amounts below the minimum and the sale restrictions placed on the below-minimum transaction could affect the liquidity of the position, FINRA said. Those failures constituted violations of MSRB Rules G-17 on fair dealing and G-47 on time of trade disclosure.

The $210,000 fine is comprised of $195,000 for the G-15 violations and $15,000 for the G-17 and G-47 violations. FMSbonds also must offer rescissions to its customers, a process it has already started.

FINRA's findings against Boston-based Santander involve activities that took place from July 1, 2013 through Sept. 31, 2013. The self-regulator said Santander sold munis in 12 transactions at aggregate prices that were not fair and reasonable. The conduct violated G-17 and G-30 on prices and commissions, according to FINRA.

Santander agreed to a $175,000 fine as well as to pay $62,807 plus interest in restitution to the customers involved in the transactions.

New York-based J.P. Morgan's settlement included both muni and corporate reporting violations that took place from March 1, 2008 through June 30, 2013. The firm, which disclosed the late trade reporting to FINRA, failed to properly report information regarding 132,839 purchase and sale transactions in municipal securities to the MSRB's Real-Time Transaction Reporting System. The failures violated MSRB Rule G-14 on reports of sales or purchases.

The late reporting involved essentially "riskless" principal transactions where certain trading desks facilitated client transactions by buying or selling with other dealers and then engaging in corresponding, offsetting transactions with clients. The firm reported the street-side transactions to RTRS within the required 15-minute reporting window but not the client-side transactions, according to FINRA.

J.P Morgan's fine involved $287,500 for the G-14 violations and $50,000 for supervisory failures that violated MSRB Rule G-27 on supervision.

FINRA found that from Oct. 1, 2011 through Oct. 31, 2013, Texas-based Investment Professionals used a broker's broker or alternative trading system (ATS) to make 167 sets of transactions that did not create a change in beneficial ownership. In each set of transactions, Investment Professionals: purchased bonds from its customer; sold those bonds to either a broker's broker or an ATS; purchased the bonds from the same broker's broker or ATS; and sold the bonds to the same customer, FINRA said.

L.J. Hart's violations involve an employee, identified as B.J., who had no financial industry experience but was nonetheless allowed to meet with school districts and act as a municipal securities representative from Aug. 1, 2013 through Nov. 19, 2014. The employee acted as a municipal advisor while meeting with approximately 20 school districts over the time period and engaged in muni transactions in an underwriter capacity, FINRA said. L.J. Hart violated MSRB Rules G-2 and G-3 on professional qualification, according to FINRA.

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