WASHINGTON — The Financial Industry Regulatory Authority fined TD Ameritrade Inc., Scottrade Inc., and Fidelity Brokerage Services LLC $35,000 each for failing to disclose the underlying ratings of insured bonds, which it said constituted material information that customers purchasing the bonds needed to know.
Though the enforcement actions, which were publicly released Tuesday amid an ongoing FINRA “sweep” into retail sales practices, it was unclear if they were related to the sweep or were stand-alone cases.
FINRA spokeswoman Nancy Condon was unavailable to comment.
Still, the actions come four months after FINRA and the Municipal Securities Rulemaking Board reminded dealers of their obligations to investors when selling them munis in the secondary market.
Both regulators issued notices in September emphasizing dealers’ responsibilities to fully review and analyze the bonds they sell in order to meet their disclosure, suitability and pricing obligations under MSRB Rule G-17 on fair dealing, G-19 on suitability, and G-30 on prices and commissions, as well as the federal securities laws.
All three firms accepted FINRA’s sanctions without admitting or denying the self-regulator’s findings.
Specifically, FINRA found that from July 14, 2009, to Jan. 19, 2010, Bellevue, Neb.-based TD Ameritrade failed to disclose to certain customers the underlying credit ratings of insured municipal bonds at or before the time of purchase, in violation of G-17.
From July 22 to Sept. 26, 2008, FINRA found that St. Louis-based Scottrade both failed to determine whether the underlying ratings of issuers of insured municipal securities constitute material information required to be disclosed and failed to disclose the issuer’s rating for 14 Jefferson County, Ala., sewer warrant transactions during the review period.
Similarly, the self-regulator found that the from July 22 to Oct. 31, 2008, Fidelity’s Smithfield, R.I.-based brokerage unit failed both to determine whether the underlying credit ratings of issuers of insured muni bonds constitute material information and failed to disclose the issuer’s rating in 52 sales transactions of Jefferson County warrants.
Vin Loporchio, a spokesman for Fidelity Investments, said the brokerage subsidiary has “addressed the matters raised by FINRA so that customers are provided with the underlying credit rating of insured municipal bonds to the extent the information is known or generally available to [Fidelity Brokerage Services] from its third-party data sources.”
A spokeswoman for TD Ameritrade could not be reached and a Scottrade spokeswoman declined to comment.
In its September notice, the MSRB warned dealers that they must analyze and disclose to customers the risks associated with the bonds they sell, including but not limited to the bond’s credit risk, in order to meet their obligations under G-17 and G-19.
“While the MSRB generally considers credit ratings and rating changes to be material information for purposes of disclosure, suitability and pricing, they are only one factor to be considered, and dealers should not solely rely on credit ratings as a substitute for their own assessment of a bond’s credit risk,” the board said.
The MSRB also reiterated previous guidance in which it said the credit rating of the issue, or the lack of one, as well as the underlying credit rating or its absence is material information “if known to the dealer or if reasonably available from established industry sources.”
The enforcement actions come as the MSRB is negotiating with the three major credit agencies that rate municipal securities to post ratings on its Electronic Municipal Market Access, or EMMA, site.
Only Fitch Ratings has publicly said it would participate. Standard & Poor’s said it would not feed its ratings because of concerns for the protection of its intellectual property. Moody’s Investors Service declined to comment.
Separately, FINRA also announced Tuesday that it fined Agoura, Calif.-based Stark, Salter & Smith, also known as IE Investments Inc., $12,500 for failing to report the correct trade time in reports submitted to the MSRB’s real-time transaction reporting system.
From Jan. 1 through March, 31, 2009, FINRA found that the firm failed to report the correct time of trade to the RTRS in 95 reports for muni transactions.
The firm also failed to report information regarding 84 of the 95 transactions within the 15 minutes required by Rule G-14 on transaction reporting. The 95 transactions constituted 2.35% of the 4,045 matched interdealer reports submitted by the firm during the review period, FINRA said.
FINRA said the firm also failed to show the correct time of trade in memos of 94 muni transactions, in violation of the Rule G-8 on books and records.
In addition, the firm failed to report information about 136 muni purchase and sale transactions to RTRS within 15 minutes. The transactions constituted 3.31% of the total transactions the firm reported to RTRS during the review period, FINRA found.
FINRA fined Houston-based NEXT Financial Group $400,000, and ordered it to pay $103,180, plus interest, in restitution to customers, for numerous corporate and municipal rules violations.
The muni rule violations, which were limited to violations of the MSRB’s Rule G-27 on supervision and G-30 on prices and commissions, appeared to represent a small portion of the overall fine, though FINRA provided no breakdown.
Specifically, the self-regulator found that nine brokers charged unreasonable markups or markdowns, which ranged from 3.01% to 4.58%, on 19 “riskless” municipal bond transactions. These are transactions in which the brokers almost simultaneously bought and sold securities, without taking on any market risk.
In four of the transactions the firm reduced the markup shortly after the transaction but kept the markup slightly above 3% in each instances.
In six other instances, the firm changed the markup after FINRA brought the markups to its attention, but again kept each of the markups slightly above 3%.
Spokesmen for Stark, Salter & Smith, as well as NEXT Financial, could not be reached. The two firms neither admitted nor denied FINRA’s findings.