In what appears to be the first enforcement case in recent years involving the Municipal Securities Rulemaking Board's controversial Rule G-23, the Financial Industry Regulatory Authority has imposed a $10,000 fine on the former A. G. Edwards & Sons Inc. in St. Louis for failing to disclose to customers who purchased muni bonds from four deals it underwrote that it had been the financial adviser for the deals.
A.G. Edwards was acquired by Wachovia NA last year.
FINRA also fined Charles Schwab & Co. in San Francisco $38,000 for telling customers that municipal securities with mandatory redemption features were noncallable, and fined Stanford Group Co. in Houston $10,000 for failing to file timely and accurate trade data under the MSRB's Real-Time Transaction Reporting System.
The cases - along with another in which a FINRA hearing panel fined two former principals at a firm $60,000 and barred and suspended them for participating in a fraudulent trading scheme involving zero-coupon muni bonds - were disclosed in FINRA's latest monthly report of disciplinary actions, which was released Monday.
The firms neither admitted nor denied the charges but agreed to the sanctions.
Rule G-23 has been controversial in recent years because the National Association of Independent Public Finance Advisors claims broker-dealers are not complying with it. The rule allows a dealer-financial adviser in a negotiated bond deal to switch roles and become the underwriter for the deal, so long as it discloses to the issuer both the possibility of conflicts of interest and the amount of its expected compensation. The rule also requires a broker-dealer who switched roles and then sold the bonds to disclose to the customers that it had served as FA for the deal.
NAIPFA twice asked the MSRB to toughen the rule, but the board declined to do so. The association also complained the rule is not enforced. The dealer-FA community claims NAIPFA's concerns are unfounded.
In the case involving A. G. Edwards, FINRA did not identify the issuer or the bond transaction. It would only say that the firm began serving as FA to the issuer on Nov. 10, 2004, and then underwrote at least four of the issuer's bond deals from September 2005 though May 2006. But statistics from Thomson Reuters suggest the bonds may have been refunding bonds issued for authorities in Ottawa County, Mich. An Ottawa County official familiar with the issues could not be reached for comment.
FINRA said that while the firm resigned as financial adviser on the bond issues when it became underwriter, it failed to disclose its FA status to customers who purchased the bonds.
The self-regulator said A. G. Edwards violated not only its Rule G-23 on FA activities, but also its Rule G-27 on supervision for failing to have a reasonable supervisory system to monitor its compliance with the rule.
Charles Schwab was fined $38,000 for violations of MSRB Rule G-15 on confirmation, clearance and settlement, and other requirements after selling 845 muni securities to retail clients between 2000 and 2006 with confirmation statements that stated the bonds were noncallable.
FINRA said the confirmation statements should have disclosed that the bonds contained sinking funds with mandatory redemption features under which the issuer could begin calling the bonds in "controlled numbers" a few years before their maturity dates.
FINRA charged the Stanford Group violated MSRB rules G-14 and G-27 for trade reporting and supervisory failures. According to the self-regulator, in 2006, between April 1 and June 30, the firm failed to report 147 muni trades with customers within 15 minutes of execution as is required under G-14. It also failed to show the correct time of execution for 24 of the transactions and reported 70 "step out" transactions that it was not required to report. The firm did not have adequate written supervisory procedures for complying with the trade reporting rule, FINRA said.
The other case involve fraudulent manipulation and parking of zero-coupon muni bonds that were valued at $3.9 million at maturity and were issued to help finance the Southern Connector toll road project in Greenville, S.C. According to a FINRA hearing panel, from June 1999 through July 2004, the bonds were traded in circular patterns at ever-increasing prices.
The hearing panel charged Richard Francis Kresge from Bayshore, N.Y., former owner and president of the now defunct Yankee Financial Group Inc., with playing a key role in the scheme. It charged Stephen Ira Goldman, former co-owner and president of Golden Harris Capital Group, Inc., which J. B. Hanauer & Co. acquired in 2002, with aiding and abetting the scheme.
The panel imposed a $50,000 fine on Kresge and barred him from serving in any supervisory capacity in the financial markets. Kresge was also suspended from serving in other capacities from July 21 through July 20, 2010. Goldman, who is currently a principal at the Hanauer firm, was fined $10,000 and was suspended from the financial markets from July 21 through Jan. 20, 2009.