Edward Jones Fined for Untimely OS'

The Financial Industry Regulatory Authority censured and fined Edward D. Jones & Co. $900,000 - the largest fine of its kind - for failing to deliver official statements to its customers in a timely manner, as well as for violating supervisory and record-keeping rules of the Municipal Securities Rulemaking Board.

FINRA officials said the enforcement action, which was announced Thursday, is the largest ever against an individual firm tied primarily to violations of the MSRB's Rule G-32 on new-issue disclosures.

The rule generally requires that dealers provide investors with copies of OS' by or before the settlement of muni transactions, though there are some exceptions for short-term debt. Dealers generally can assume they have met this requirement if they mail copies of the OS at least three business days before settlement, under the MSRB rule.

Without admitting or denying the charges, the St. Louis-based firm consented to FINRA's findings that from "at least" 2002 through September 2008, it failed to timely deliver OS' for "a significant portion" of the new-issue munis it sold to its retail customers when it was not an underwriter or a member of the syndicate.

"Offering statements are crucial disclosure documents that investors are entitled to receive and the rule requires that they receive those from dealers, even from dealers not part of the syndicate," FINRA executive vice president and chief of enforcement Susan Merrill said in an interview. She urged dealers to regularly audit their back-office operations to ensure that investors receive their OS' by the settlement date.

A lack of training, incorrect instructions, as well as limited photocopying capacity and errors by employees, including trading supervisors, led to "systemic" problems at Edward Jones, FINRA found.

In addition to the G-32 violations, FINRA found that the firm violated MSRB Rules G-8 on records and G-27 on supervision.

Among other things, FINRA found that Edward Jones' own internal communications repeatedly referenced that it was not delivering OS' in a timely manner. For instance, a compliance officer at the firm knew OS' were being mailed as late as 30 days after settlement, while mail room employees were being told, incorrectly, that it was okay to mail the documents seven to 14 days after settlement. Still, the firm failed to take "reasonable and sufficient steps" to comply with its obligations, FINRA said.

In a brief statement, Edward Jones said it has corrected issues related to late delivery of offering statements. "We're pleased this issue - which we reported to regulators in 2006 - has been resolved and look forward to providing continued exceptional service to our clients," the statement said.

Specifically, FINRA found that from August 2002 through May 2003, the firm did not deliver in a timely manner official statements to customers who purchased municipal bonds in over 1,200 transactions, while officials statements for 270 of these transactions still had not been mailed as of September 2003 - at least four months after settlement date.

From February 2004 through May 2006, the firm engaged in approximately 100,000 new-issue municipal bond transactions in which it was not an underwriter or in the syndicate. The firm was late in filing OS' for "a significant number" of these transactions, FINRA said.

The self-regulator found that the untimely deliveries continued into 2008, with the firm in September mailing late OS' for over 6,200 transactions, which represented 19% of the firm's muni bond transactions covered by Rule G-32. Of these 6,200 transactions, over 5,000 were mailed on the day prior to settlement date, and over 1,100 were mailed on settlement date, rather than at least three days before that date.

The settlement date varies for each transaction, but is generally about two weeks after the sale date on fixed-rate deals.

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