WASHINGTON – Merrill Lynch, Pierce, Fenner & Smith, a subsidiary of Bank of America, was ordered to pay $422,708 in fines and restitution by the Financial Industry Regulatory Authority for charging customers excessive markups and markdowns on municipal securities.
Stifel, Nicolaus & Company was directed by FINRA to pay a $25,000 fine for selling munis below minimum denomination designations.
The actions were disclosed in FINRA's monthly disciplinary report for May. Officials with the firms declined to comment. Both actions were settled without the companies admitting or denying the charges.
The examiners discovered New York City-based Merrill Lynch's pricing abuses during three examination periods between January 1, 2009 and September 30, 2010.
FINRA said in the settlement document that Merrill Lynch failed to consider all relevant factors, including the best judgment of the broker as to the fair market value of the securities at the time of the transaction, the expense involved in executing the transaction, the fact that the broker is entitled to a profit, and the total dollar amount of the transaction.
The conduct violated Municipal Securities Rulemaking Board Rule G-17 on fair dealing and G-30(a) on pricing and commissions related to principal transactions, according to FINRA.
The firm was fined $317,500 and ordered to pay customers $14,367 plus interest in restitution. The restitution amount is in addition to a total of $90,841 the firm has already paid to a number of customers.
St. Louis, Mo.-based Stifel's $25,000 fine was the result of findings that the firm, in 22 transactions executed between Jan. 1, 2012 and May 1, 2015, sold customers amounts of munis that were below the stated minimum denomination for the bonds without qualifying for an exemption, FINRA said. The sales violated MSRB Rule G-15(f) on minimum denominations, according to the self-regulator.
Issuers may set minimum denominations in official statements for bonds to discourage retail customers from buying risky munis. For example, an issuer may set a minimum denomination of $100,000 if it is concerned that the munis are inappropriate for retail investors who typically only purchase securities in relatively small amounts.
Rule G-15(f) prohibits dealers from trading below the minimum denomination but makes two exceptions. A broker-dealer can purchase munis from a customer in an amount below the minimum denomination of the issue if the dealer determines that the customer's position is already below the minimum denomination and the customer's entire position would be liquidated as a result of the transaction. A broker-dealer also can trade below the minimum denomination if it determines the position is being sold because another customer's entire position that was below the minimum denomination was liquidated.
If a broker-dealer is trading below the minimum denomination, it must notify the customer of that fact as well as the possibility that the transaction could adversely affect the liquidity of the customer's position.
In a separate but related past action, the Securities and Exchange Commission fined Stifel $60,000 in November 2014 for trading below the minimum denomination with one customer transaction, according to FINRA.
