Boutique broker-dealer First Southern LLC has agreed to pay $250,000 to settle Financial Industry Regulatory Authority allegations it violated municipal securities and other rules, including failing to establish written policies and procedures and understating its net capital.
The firm has also filed inaccurate financial and operational reports, failed to timely and accurately report approximately 5,000 transactions to the Municipal Securities Rulemaking Board's Real-time Transaction Reporting System, and failed to reasonably supervise that reporting in violation of MSRB Rules G-14 and G-27, FINRA said.
Headquartered in Guaynabo, Puerto Rico, First Southern currently employs 42 registered representatives in four branch offices, according to FINRA. The firm describes itself as a full-service broker dealer with a "cornerstone business" of trading fixed income securities, primarily in the secondary market.
First Southern accepted the findings without admitting or denying them. The firm did not return calls seeking comment.
FINRA found that since June 2020, the firm has violated MSRB Rule G-27, which requires broker dealers to establish and maintain a supervisory system, including written procedures, to supervise the conduct of their municipal securities activities to ensure compliance with MSRB rules and applicable provisions of the Securities and Exchange Commission rules.
The firm has also inaccurately reported its aggregate indebtedness and net capital since January 2020 and filed at least 29 Financial and Operational Combined Uniform Single, or FOCUS, reports, FINRA said. That's a violation of MSRB Rule G-8, which requires broker dealers to keep accurate books and records.
"Specifically, when participating in a firm commitment offering of municipal securities, First Southern is required to take certain maturity- and CUSIP-specific haircuts on the underwritten municipal securities it committed to purchase (known as open contractual commitment charges) from its net capital," the regulator said, adding that First Southern is required to report the haircuts it has taken on open contractual commitments that remain outstanding at month's end on all its FOCUS reports.
"Rather than apply the maturity- and CUSIP-specific haircuts, First Southern uses a blanket seven percent haircut when calculating the value of its open contractual commitments of municipal securities the firm underwrites," FINRA said. "As a result, First Southern miscalculates the actual open contractual commitment charges associated with its firm commitment underwriting activity."
On the trading side, FINRA said between November 2017 and December 2021, First Southern failed to report to the MSRB's Real-time Transaction Reporting System "accurate time of execution and capacity for approximately 5,000 municipal securities transactions executed for an affiliated hedge fund."
The reporting errors were due to the firm's practice of bulk reporting at the market's close all same-side, same-security transactions in which its affiliated hedge fund participated, FINRA said.
"The result was that in approximately 5,000 instances, First Southern reported customer trades for its affiliated hedge fund more than 15 minutes after it timely reported the corresponding interdealer and/or street-side trades," the regulator said, adding that the reports account for roughly 37% of the firm's total reports in municipal securities transactions during that time. First Southern corrected this "batch upload" practice in December 2021.
In addition to the fine, the firm agreed to a censure and to undertake a corrective plan.
