WASHINGTON – Fidelity Brokerage Services is to pay $45,000 in a settlement with the Financial Industry Regulatory Authority over charges of trading below the minimum denomination. The Frazier Lanier Co. will pay $35,000 related to muni trade reporting failures, according to documents recently posted on FINRA’s website.
Both firms agreed to the settlements without admitting or denying FINRA’s findings. A representative from Alabama-based Frazier Lanier declined to comment. Rhode Island-based Fidelity Brokerage Services said the firm has enhanced its systems and processes “to continue to offer high quality services and prices to our clients."
Fidelity’s trading below the minimum denomination took place between Dec. 1, 2013 and Dec. 31, 2015, according to FINRA. The self-regulator found that the firm carried out 15 customer transactions in municipal securities in amounts below the issuer-set minimum denomination for the bonds during the two years. Fidelity also failed to tell customers in 14 of the transactions that the sales were in below-minimum amounts.
Issuers disclose the minimum denominations for their securities in the official statements. The minimums generally range from between $5,000 and $100,000, according to FINRA. Denominations of $100,000 or higher qualify for certain exemptions under the Securities and Exchange Commission’s Rule 15c2-12 on municipal disclosure and can also be used to discourage retail investors from purchasing securities that may not be appropriate for them.
The Municipal Securities Rulemaking Board’s requirements on minimum denominations are contained in its Rule G-15, which prohibits dealers from trading below the minimum outside of certain, limited exceptions. The rule requires that a dealer selling bonds in a below-minimum amount notify the customer that the amount is below the minimum and could have a negative effect on the liquidity of the customer’s position. That notification must come either at the time of the transaction or before the transaction is completed. FINRA found that Fidelity’s below minimum trading did not qualify for the exceptions in the rule and that the firm did not report to customers as required by the rule.
The firm violated MSRB Rule G-17 on fair dealing , which requires a dealer engaging in a transaction with a customer to give the customer all material information that the dealer knows about the transaction. That requirement was codified into MSRB Rule G-47 on time of trade disclosure in 2014, meaning Fidelity violated both G-17 and G-47 during the period in question, according to FINRA.
The firm additionally violated MSRB Rule G-27 on supervision because it did not have reasonable supervisory procedures in place to comply with the other MSRB rules. In addition to its fine, Fidelity will have to revise its supervisory procedures and offer each of the customers in the below-minimum transactions the opportunity to cancel the trades.
FINRA’s findings against Frazier Lanier are related to activities the firm engaged in between July 9, 2012 and March 21, 2014 as well as May 12, 2014 and April 14, 2016. During these periods, the firm failed to report 95 of 358 new issue transactions in municipal bonds to the MSRB’s Real-time Transaction Reporting System. The 95 transactions amounted to 27% of the 358 new issue transactions the firm carried out during that time, FINRA said.
The reporting failures were specifically related to Frazier Lanier’s underwriting review of five new issues where the firm was the sole or lead underwriter. The failures represent violations of MSRB Rule G-14 on reports of sales and purchases, according to FINRA. Frazier Lanier also violated Rule G-27 because its supervisory procedures were inadequate to ensure timely and accurate muni trade reporting, FINRA said.
The supervisory failures extended to the firm’s payments to third party entities where there were one or more individuals affiliated with an issuer with which Frazier Lanier had also conducted a muni offering, FINRA said. The self-regulator added that, in some instances, the affiliated municipal person the firm made payments to may have had a direct or indirect influence over the issuer, giving rise to a conflict of interest.