PHOENIX - The Financial Industry Regulatory Authority has fined three firms and suspended an individual for violations of municipal securities rules, including improperly charging for ratings trip expenses, trade reporting violations, supervisory failures, and making unsuitable recommendations.
The firms are Davenport & Co., George K. Baum & Co., and Cantor Fitzgerald & Co. The individual is Todd Kimm, who at the time of the violations was with Merrill Lynch, Pierce, Fenner & Smith Inc. The parties agreed to pay a combined total of $187,500 to settle the charges of muni rule violations without either admitting or denying FINRA’s charges.
New York-based Cantor agreed to pay $130,000 after FINRA found that the firm had failed to timely report hundreds of transactions in 2015 and 2016 to the Real Time Trade Reporting System as required by Municipal Securities Rulemaking Board's Rule G-14 on reports of sales or purchases. The firm also failed to correctly document some of those transactions in violation of Rule G-8 on books and records, according to the self-regulator.
FINRA also said the firm did not have a supervisory system in place that properly designates individuals responsible for supervision, or specifies what steps they should take in their reviews, or how often they should conduct the reviews, and how to document them. That failure was a violation of MSRB Rule G-27 on supervision, FINRA said.
As part of the settlement, Cantor agreed to file within 90 days a report to FINRA describing the steps it would take to address the supervisory failures. The firm also was required to meet with FINRA staff within 180 days and provide them an update.
Richmond, Va.-based Davenport agreed to pay FINRA a total of $115,000 to settle charges that it also had supervisory failures, but only $20,000 of that fine was related to MSRB Rule violations. The conduct was related to the firm’s use of two alternative trading systems from February 2014 to December 2015. The firm used “ATS A” to execute muni transactions for institutional clients and primarily used “ATS B” to execute transactions for retail clients, FINRA found.
But the firm’s supervisory procedures were not reasonably designed to “prevent trades that exceeded capital and credit limits prior to trade execution through the ATSs, as required by The Securities Exchange Act's Rule 15c3-5(c),” FINRA found. As such, the firm violated not only the securities laws but also G-27, which requires written supervisory procedures be reasonably designed to ensure compliance with the laws.
George K. Baum, which has its muni headquarters in Denver, agreed to pay $35,000 to settle charges that it improperly used muni bond proceeds to reimburse the firm for expenses incurred on three rating trips that were not “reasonably related” to business.
The trips occurred between February and December of 2014, and involved three bond deals in which the firm was acting as the financial advisor. After the trips, FINRA said, the firm used bond proceeds to reimburse itself for such items as Broadway musical and baseball game tickets, extra nights at a hotel for a GKB representative and the representative’s spouse, as well as the cost of a representative’s spouse’s travel and meals. All told, FINRA said, GK improperly saddled taxpayers with more than $5,000 of costs unrelated to business.
That conduct violated MSRB Rule G-17, FINRA said, which requires firms to deal fairly. The firm also failed to have a system in place to prevent the overbilling, a G-27 violation, FINRA determined.
Kimm agreed to pay $2,500 for muni violations and to a six-month suspension to settle charges that between July 2010 and July 2013 he recommended over 100 unsuitable short-term trades of long-term investment products and eight unsuitable mutual fund switches in the account of one customer, and exercised discretion without written authorization in the same customer's account.
Kimm recommended that his customer sell municipal bonds soon after buying them, FINRA said, though all the bonds in question were products intended for customers with long-term investment time horizons and which carried substantial commissions.
“Kimm had no reasonable basis to believe that such short-term trading was suitable for any customer,” FINRA said, adding that he also exercised his own discretion in making trades in that customer’s account without obtaining written authorization. His conduct cost his customer about $200,000, FINRA said, and violated Rule G-19 on suitability of recommendations and transactions as well as G-17.
The parties disciplined either did not respond to requests for comment or could not be reached.