WASHINGTON – Municipal market participants are criticizing as too low the $50,000 fine that the Financial Industry Regulatory Authority imposed on Dougherty & Co. after finding the firm served as an underwriter for 54 issuers with which it had ongoing "blanket" financial advisory agreements.
The Minneapolis-based firm agreed to settle the charges FINRA brought for violations of Municipal Securities Rulemaking Board Rule G-23, which prevents firms from serving as both financial or municipal advisors and underwriters on the same transactions.
A spokesperson for FINRA said "the sanction imposed was appropriate given the facts and circumstances of the case."
Dougherty officials and their lawyers could not be reached for comment.
Market participants, each of whom asked to remain anonymous, said the fine was extremely low given the wide scope of the violations. The fine should have been in the hundreds of thousands of dollars, they said. FINRA's fine breaks down to less than $1,000 per issuer, given that there were 54 issuers, they added.
FINRA's sanction guidelines state that the purpose of FINRA's disciplinary process is "to protect the investing public, support and improve the overall business standards in the securities industry, and decrease the likelihood of recurrence of misconduct by the disciplined respondent."
"Adjudicators should design sanctions that are meaningful and significant enough to prevent and discourage future misconduct by a respondent and deter others from engaging in similar misconduct," the guidelines state.
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 an issuer to put that issuer client's interests first. However, an underwriter's primary role is to purchase or arrange for the placement of securities in an arms-length transaction with the issuer. The underwriter puts its own interests first.
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 advisory agreements did not contain limitations on the time they would be in effect or the specific issuances they would cover. Instead, the agreements listed Dougherty's financial advisory obligations as encompassing all "projects that require the issuance of obligations," FINRA said. The agreements detailed Dougherty's responsibilities as including 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, according to FINRA.
Some market participants wondered whether the low fine was a result of FINRA concluding Dougherty's G-23 violations were only procedural failures stemming from the firm not taking the steps to identify itself only as an underwriter for the issuances. Also, FINRA found the firm's advisory agreements stated it would receive a fee for each bond issue on which it provided advisory services, but Doherty only received underwriting fees for its underwriting work with the 54 issuers.
The MSRB's interpretive guidance for Rule G-23 says that a dealer with an existing advisory agreement with an issuer that wants to act as underwriter on a specific issue can be exempted from the rule's prohibition if the dealer "clearly identifies itself in writing as an underwriter and not as a financial advisor from the earliest stages of its relationship with the issuer with respect to that issue."
A search of FINRA's website yields relatively few results for past actions related to G-23 violations.
In June 2014, FINRA fined Cooper Malone McClain (CMMC), a Wichita-based broker-dealer, $10,000 for violating Rule G-23(d).
FINRA found that in December 2012, CMMC underwrote a $350,000 general obligation note issuance for the city of Scandia, Kan., with which it had a financial advisory agreement. The FA agreement was still in effect at the time CMMC underwrote $350,000 of Scandia's general obligation notes. CMMC immediately sold the entire issue to a local Scandia bank, a transaction that both parties had previously negotiated. CMMC received a $10,000 financial advisory fee for its role, consistent with its advisory agreement, but did not receive any additional payments from Scandia for acting as an underwriter and did not impose any markups or commissions when it sold the notes to the bank.
