FINRA Fines 8, Asks for Restitution From 2

WASHINGTON — The Financial Industry Regulatory Authority fined eight firms a total of $120,000 and asked two to pay almost $6,000 in restitution to customers for violating muni pricing, gift, trade, fair-dealing, and supervisory rules.

One of the largest fines — $20,000 — was levied against The Frazer Lanier Co., based in Montgomery, Ala., for advancing the expenses of family members for a firm official and issuer official on rating agency trips and then reimbursing itself from bond proceeds.

Polar Investment Counsel Inc. in Thief River Falls, Minn., and Wayne Hummer Investments LLC in Chicago, were each fined $10,000 for selling munis to customers at unfair and unreasonable prices. Polar Investment was ordered to pay almost $3,939 in restitution to customers and Wayne Hummer had to pay almost $2,015 in restitution.

Five other firms were fined for violating muni bond trade rules. The firms and their fines are: Wells Fargo Advisors LLC in St. Louis, $20,000; JPMorgan Securities LLC in New York, $20,000; Gates Capital Corp. in New York, $17,500; Charles Schwab & Co. in San Francisco, $12,500; and Seattle-Northwest Securities Corp. in Seattle, $10,000.

The firms neither admitted nor denied the findings.

The violations against Frazer Lanier stemmed from muni bonds it underwrote for a municipality in Alabama in 2008 and 2009. According to FINRA, the mayor of the municipality and a principal from the firm made trips to New York to meet with analysts from the credit rating agencies. For the first trip in 2008, each brought their wives. They brought their wives on the second trip in 2009, but a firm official also brought his sister-in-law. The firm advanced payment for expenses including airfare, limousines, and luxury hotel accommodations totaling more than $3,838, then reimbursed itself from bond proceeds.

FINRA said the payment of family expenses violated the Municipal Securities Rulemaking Board's rules G-20 on gifts and G-17 on fair dealing because they were not legitimate business expenses. The firm also violated the board's Rule G-27 by not having sufficient supervisory procedures in place. The firm told FINRA "this was an isolated incident" and that it would update its procedures.

FINRA said Polar Investment, in five pairs of contemporaneous principal transactions between July 1 and Sept. 30, 2008, sold munis for its own account to a customer at an aggregate price that was not fair or reasonable, taking into consideration a broad range of facts including that it is entitled to a profit. The firm violated G-17 on fair dealing and G-30 on pricing.

The firm told FINRA afterward that it implemented a policy prohibiting markups and markdowns in excess of 3% in any circumstance unless they are approved in advance by senior compliance personnel. But Michael Jordan, the firm's chief executive and chief compliance officer said Monday, "We think that's bull----. These were institutional customers who were doing dozens, if not hundreds, of trades. If you look at the trades overall, the markups were less than 1%."

FINRA said that Wayne Hummer, from Oct. 1 through Dec. 31, 2008, in five pairs of transactions, sold munis for its own account to a customer at an aggregate price that was not fair or reasonable. The firm violated G-17 and G-30.

Wells Fargo violated G-14 on trade reporting by failing to provide the correct yield for 12 trades reported to the MSRB during the third quarter of 2009 and for 16 trades reported during the second quarter of 2010, FINRA said. The firm also violated Rule G-15 on confirmation by failing to provide written notification that it disclosed the lowest yields to customers in the 12 trades in 2009 and in 15 of the 16 trades in 2010.

JPMorgan was charged with violating G-14 during both 2008 and 2009. In 2008, the firm failed to report information from 597 muni trades within the required 15 minutes after execution and reported data it was not required to report for 73 trades, FINRA said. In 2009, the firm failed to report 981 trades within 15 minutes, it said.

Gates Capital was fined for trade, records, and supervisory rule violations during Oct. 1 through Dec. 31, 2009. FINRA said the firm failed to report the correct time of trade in 64 trade reports filed with the MSRB and failed to meet the 15-minute deadline for filing reports for 144 trades. In addition, the firm did not show the correct time of execution on memos for 59 trades and did not have appropriate supervisory rules.

Schwab failed to timely report 3,210 muni trades as well as the correct tine of execution for 652 of them, FINRA said. Seattle-Northwest did not timely report 154, or 3% of trades reviewed between Oct. 1 through Dec. 31, 2008, FINRA found.

Wayne Hummer, Wells Fargo, JPMorgan, Gates Capital, and Schwab either did not respond or declined to comment.

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