Interactive Brokers LLC agreed to sanctions including a $125,000 fine to settle Financial Industry Regulatory Authority allegations that the firm committed municipal securities rule violations linked to transactions involving bonds that traded at market discounts.
FINRA alleged that the Greenwich, Conn.-based firm violated Municipal Securities Rulemaking Board Rule G-27, which requires dealers to establish and maintain a supervisory system, and MSRB Rule G-47, which pertains to time of trade disclosure.
Interactive Brokers consented to FINRA's findings without admitting or denying them according to a settlement document FINRA accepted Sept. 29. In addition to the fine, Interactive Brokers agreed to the imposition of a censure.
According to FINRA, between January 2022 and October 2024, the firm failed to establish and maintain a supervisory system – including written procedures – sufficient to achieve compliance with Interactive Brokers' "obligation to provide customers time of trade disclosures regarding the fact that certain municipal bonds traded at a market discount and that all or a portion of the investor's investment return represented by accretion of the market discount might be taxable as ordinary income."
In instances where a market discount exceeds an Internal Revenue Code-defined threshold, the discount may be deemed "non-de minimis" and typically will be taxed as ordinary income, according to FINRA, whose findings were detailed in the settlement document.
"MSRB guidance in effect during the relevant period stated that the fact that a municipal security bears a market discount is material information required to be disclosed to a customer under Rule G-47," FINRA said in its findings.
While the firm used a third-party vendor to supply time trade disclosures, Interactive Brokers' written procedures didn't specify how it would supervise the vendor and the firm lacked any process for verifying that buyers of bonds with non-de minimis market discounts had received adequate disclosures.
During the period between January 2022 and October 2024, Interactive Brokers failed to disclose non-de minimis market discounts in 1,918 transactions with a total principal value of about $40 million involving 130 customers, according to FINRA.
"The firm subsequently provided the required disclosures to impacted firm customers, as well as an offer to compensate the customers for demonstrated adverse tax consequences resulting from the belated disclosures," FINRA said.
FINRA also said that in October 2024, Interactive Brokers and its third-party vendor instituted an automated notification that requires customers to acknowledge at the time trade the possible tax consequences of their transaction when buying bonds trading at non-de minimis market discounts. Customers must acknowledge the disclosure prior to completing the transaction, FINRA said in its findings.
Interactive Brokers "is pleased to have resolved this matter," the firm said in a statement provided via a spokesperson.
"Interactive Brokers LLC ("IBKR") promptly addressed the issue that gave rise to the settlement and cooperated with FINRA's investigation," the statement said.
