FINRA settles two cases for violating fair dealing
In two separate cases, regulators agreed to settle with two parties for violating fair dealing rules, and other municipal market rules, from whiting out dates to not disclosing a $2 million fee until up to an issuance.
The Financial Industry Regulatory Authority reached a settlement with Dinosaur Financial Group LLC on Thursday, according to FINRA documents. The firm will pay a $200,000 fine, $60,000 of which pertains to Municipal Securities Rulemaking Board rule violations for not timely and correctly reporting information, FINRA wrote. The firm failed to report, timely report and/or correctly report 892 TRACE-eligible transactions between October 2015 and September 2017. During that time, it also failed to timely report 364 municipal securities transactions to the Municipal Securities Rulemaking Board’s Real-Time Reporting System, FINRA found.
Dinosaur has been a FINRA member since 2001 and has about 91 registered individuals out of 10 branch offices. Its customers are retail, accredited high-net-worth clients and institutional entities.
Dinosaur did not admit or deny FINRA’s findings.
MSRB’s RTRS collects and disseminates transaction data to enhance market transparency. Brokers-dealers must report those transactions or they will violate MSRB Rule G-14, on reports of sales or purchases. Rule G-14 requires that transactions be reported within 15 minutes of a trade being executed.
The firm also failed to establish, maintain and enforce a supervisory system to ensure accurate reporting, violating MSRB Rule G-27 on supervision, FINRA wrote.
FINRA also found that Dinosaur altered information on six monthly MSRB reports that it produced to FINRA be either backdating dates that the reports were purportedly reviewed, or whiting out dates reflected when the reports were generated to hide the fact that trade reviews were not done on a timely basis. Therefore, Dinosaur also violated FINRA Rules 8210 and 2010 and MSRB Rule G-17 on fair dealing.
FINRA found that the firm violated Rule G-14 after reviewing a sample of 6,650 transactions in municipal securities between October 2015 and September 2017. Of those, Dinosaur failed to report 364 transactions within the required 15-minute reporting timeframe.
“During the fourth quarter of 2015, the Firm failed to report 99 municipal securities transactions to RTRS, or 10.9% of the total 905 trade reports in municipal securities that Dinosaur reported to MSRB during this period, within the 15-minute reporting timeframe,” FINRA wrote.
Dinosaur failed to timely identify and remediate its trading deficiencies, FINRA found even after it altered the firm.
Dinosaur’s attorney did not immediately respond to comment.
Also on Thursday, FINRA settled with a municipal securities principal who it found to have not disclosed a “development fee” until until the issuance.
As an investment banking representative in connection with an underwriting of municipal securities in a conduit financing for Company A, Lori Sullivan Antolovic failed to confirm that Individual A, a member of Company A’s board of directors, had authority to direct the payment of a $2 million “development fee” to a company he controlled, Company B, from the proceeds of the offering, FINRA wrote.
Therefore, Antolovic violated MSRB Rule G-17 by not dealing fairly to the conduit borrowers. Antolovic will be suspended for three months from associating with any FINRA member firm and fined $7,500.
Between September 2013 and January 2014, Antolovic structured a conduit issuance to refinance Company A’s debt. Antolovic’s associated firm, Raymond James, served as the sole underwriter of the offering.
Individual A asked that the company that he controlled received $2 million in compensation from the underwriter. Antolovic correctly let him know that the payment was prohibited, FINRA found. Individual A withdrew his request and later asked Antolovic to include in the costs of issuance a $2 million “development fee” to be paid to Company B.
“In email communications with Antolovic, Individual A made several statements suggesting that perhaps he had not informed Company A of all the specific costs to be paid out of the cost of issuance,” FINRA wrote. “Despite these indications that other officials at Company A may not have known of this material aspect of the financing, Antolovic made provision in the offering for the payment of the fee.”
FINRA found that Company A had not specifically authorized the $2 million payment. Antolovic disclosed that fee to Company A shortly before the issuance and Company A later asked that Company B return the fee, FINRA wrote.
FINRA wrote that Antolovic should have questioned whether Individual A may have been hiding information from Company A about the “development fee” that he would benefit personally from.
Antolovic’s lawyer, Emily Gordy at McGuire Wood LLP, said her client has “had a stellar career in the industry for almost 30 years and is very well respected. She’s grateful to get this all behind her and be able to move forward now that this matter is over.”
Antolovic did not admit or deny FINRA’s findings.