City National Securities has agreed to pay $315,000 and to submit a plan to buy back at par certain municipal auction-rate securities to settle charges with the Financial Industry Regulatory Authority that it failed to disclose ARS risks to customers and properly supervise sales.
FINRA announced the settlement with the Beverly Hills, Calif.-based firm, a so-called downstream ARS dealer, in its monthly disciplinary actions, along with fines of $43,000 against Deutsche Bank Securities Inc. and $15,000 against Raymond James & Associates Inc., for failing to timely or adequately report trades of municipal and corporate bonds.
City National Securities is FINRA's fifth final settlement over ARS-related violations during the past few months. The other settlements, which were similar and also involved buyback programs, included fines of $750,000 against Detroit-based Comerica Securities Inc., $300,000 against Dallas-based First Southwest Co., $250,000 against Irvine, Calif.-based WaMu Investments Inc., and $150,000 against Chicago-based Harris Investor Services Inc.
FINRA also has reached agreements in principle with: BNY Mellon Capital Markets LLC; NatCity Investment Inc.; SunTrust Investment Services Inc., and SunTrust Robinson Humphrey Inc.
The firms involved in the FINRA enforcement actions and ARS settlements neither admitted nor denied the self-regulator's findings.
In its case against City National Securities, FINRA said that the firm, between May 31, 2006, and Feb. 28, 2008, violated NASD, now FINRA, and Municipal Securities Rulemaking Board rules related to communications in the marketing and sale of ARS, as well as supervisory procedures. CNS sold about $1.9 billion of ARS, almost all municipal, to customers during that period.
As of Feb. 28, 2008, when the ARS market collapsed, about $1.95 billion of ARS was held in 1,560 retail accounts at CNS. As of Oct. 21, 2008, when the firm reached a settlement in principle with FINRA, customers held about $28 million in retail accounts, according to the self regulator.
FINRA said CNS violated MSRB Rules G-21 on advertising, G-27 on supervision, and G-17 on fair dealing, as well as FINRA rules, by failing to tell investors about the risks that ARS auctions could fail, that investments in ARS could become illiquid, and that customers might not be able to obtain funds invested in ARS for substantial periods of time.
The firm also failed to establish and maintain a supervisory system that was reasonably designed to achieve compliance with municipal and other rules, the self regulator said.
CNS agreed to a buy back at par ARS subject to failed auctions as of Oct. 21, 2008, that are not subject to calls or redemptions from investors who purchased the ARS between May 31, 2006, and Feb. 28, 2008. The firm also agreed to provide relief for investors who sold their ARS below par and to arbitrate claims for consequential damages filed by customers through a special dispute resolution program.
In its enforcement action against Deutsche Bank, FINRA said that $10,000 of the $43,000 fine was for violations of MSRB's Rule G-14 on trade reporting.
FINRA found that from July 1, 2007, through Sept. 30, 2007, the firm failed to report to the MSRB 166 trades, or 19% of all muni trades eligible for reporting, within 15 minutes after execution. The self regulator cited the firm for corporate trade and other violations as well.
In action against Raymond James, FINRA found that from Sept. 11, 2004, through May 5, 2006, the firm processed about 2,008 muni bond trades that it received from registered investment advisers handling customers' accounts at its 39 introducing or corresponding firms.
Raymond James used the introducing/corresponding firms' market participation identifier as well as its own when reporting the trades, when it should have only used its own MPID, in violation of G-14, FINRA said. The firm also was cited for corporate trade violations.
