WASHINGTON — The Financial Industry Regulatory Authority fined five firms and three individuals for violations of municipal securities requirements, including Barclays Capital Inc., which was directed to pay $200,000 for using bond proceeds to reimburse itself for membership in a lobbying group.
Barclays agreed to pay the fine, plus nearly $26,000 in restitution to issuers, to settle FINRA's findings that its conduct between December 2008 and December 2010 violated Municipal Securities Rulemaking Board Rules G-17 on fair dealing and G-27 on supervision.
FINRA investigators found that Barclays made voluntary payments to the California Public Securities Association, a lobbying organization that keeps underwriters in the Golden State apprised of legislative and regulatory developments. Cal PSA requested fees from its members based on the volume of munis they underwrote in the state. Membership was not mandatory for underwriting in California. In all, Barclays paid the group $126,251.90, FINRA found.
But the underwriter violated the rules when it sought more than $68,000 from issuers, in the form of bond proceeds, to reimburse itself for its payments to Cal PSA. The firm failed to deal fairly with issuers when it treated reimbursement for these payments as an underwriting expense on a par with travel or telephone costs. The Cal PSA expenses were not necessary to complete the underwriting, nor were they accompanied by adequate disclosure about the nature of the transaction fees, FINRA said. The firm was also tagged for its failure to have a supervisory system in place designed to ensure compliance with G-17.
The action was part of the same investigation that resulted in FINRA fining five firms, including Citigroup and Merrill Lynch, $4.48 million a year ago. But sources said, that while other firms agreed to settle, Barclays chose not to do so at the time. Barclays has returned more than $42,000 to issuers in response to a request from California Treasurer Bill Lockyer. Barclays did not respond to a request for comment.
The other firms and fines included $80,000 for Los Angeles-based Wedbush Securities Inc., $30,000 for New York-based Tradition Asiel Securities, and $17,500 for Atlanta-based Terminus Securities LLC. In addition, David Corbin and James Noble of Terminus were each fined $5,000, and another registered representative, Charles Jacobi of Vining Sparks IBG LP, was fined $10,000. The New York-based Dratel Group and proprietor William Dratel were each fined $2,500, but the fines are pending an appeal.
Most of the firms and individuals agreed to settle without admitting or denying fault. But the Dratel Group and Dratel, fined for non-muni as well as muni violations, took the matter to FINRA's Office of Hearing Officers and is now appealing an unfavorable ruling to the National Adjudicatory Council.
The action against Wedbush was the result of eight separate reviews between 2009 and 2011, during which FINRA examiners found numerous violations of MSRB Rules G-14 on reports of sales or purchases, G-8 on books and records, and G-27. In hundreds of instances, the firm did not either accurately report the time of trade or report it within the 15 minute time allotment as required by the rules, FINRA found. The firm also did not show the correct time of execution on the records of some transactions as required by G-8, and did not enforce its own written supervisory procedures which "specified that the firm would perform daily reviews of trades on the MSRB website for accuracy and timeliness," FINRA said.
FINRA tagged Tradition with similar G-14 violations for failing to meet the 15 minute reporting requirement in 171 transactions between July 1, and Sept. 30, 2012. Terminus improperly acted as the sole underwriter in a muni bond offering in September 2012 while operating with less than $100,000 in net capital. The firm, acting through Corbin and Noble, improperly included two checks in its net capital calculation, FINRA found. In addition to the fines, Corbin agreed to a 10 business day suspension and Noble agreed to a 15 business day suspension.
FINRA found Jacobi, between Jan. 1, 2007, and Dec. 31, 2008, facilitated transactions that included commissions or service charges "in excess of a fair and reasonable amount," in violation of the MSRB's fair-dealing rule. He agreed to a one-month suspension.
A disciplinary hearing determined Dratel must serve a 25 day suspension for reporting violations and for doing muni business without registering with the MSRB, but the sanction is on hold pending appeal.