Three firms pay total of $107,500 to FINRA over muni violations
PHOENIX – The broker-dealer firms of Merrill Lynch, Pierce, Fenner & Smith, Western International Securities, and Hennion & Walsh agreed to pay a total of $107,500 to settle Financial Industry Regulatory Authority charges that they violated municipal securities rules by failing to properly report trades and trading below required minimum denominations.
The payments for violating Municipal Securities Rulemaking Board rules will be $32,500 for New York-based Merrill Lynch, $20,000, for California-based Western and $55,000 for New Jersey-based Hennion.
The firms neither admitted nor denied FINRA’s findings. Western declined to comment, while Merrill Lynch and Hennion could not be reached for comment.
The settlement with Merrill arose from a report submitted by the firm relating to its failure to report certain municipal repurchase agreements, or “repos,” FINRA said in enforcement documents.
From Oct. 14, 2010 through Feb. 1, 2016, FINRA found, the firm failed to report 22,592 repo transactions to the real-time trade reporting system (RTRS). That was every transaction that the desk was required to report during that period, FINRA said.
That conduct was a violation of MSRB Rules G-14 on reports of sales or purchases and G-27 on supervision, FINRA said.
“During the review period, the supervisory system on the desk responsible for executing the relevant repo transactions did not provide for supervision reasonably designed to achieve compliance with respect to the applicable securities laws and regulations and the MSRB rules concerning the reporting of transactions in municipal securities,” FINRA said.
Western Securities submitted reports to the RTRS between July 2013 and January 2015 that contained inaccurate information for 146 of 3,021 municipal securities transactions FINRA found. As a result, the reports were rejected and the trades unreported in violation of G-14, the self-regulator said.
“Specifically, the firm inaccurately included a commission charge for each of these 146 transactions even though they were submitted as principal trades,” FINRA said
Because the firm also failed to adopt, maintain, and enforce written supervisory procedures reasonably designed to ensure compliance with the rules, it also violated G-27, according to the self-regulator.
Between December 2013 and March 2015, Hennion & Walsh executed 65 transactions in six municipal bonds below the minimum denomination set for the bonds, FINRA found. In all but two of those transactions, the self-regulator alleged, the firm failed to disclose to customers that their purchases were in an amount below the minimum denomination.
In addition, said FINRA, several of those bonds and two additional bond issues were restricted for purchase to qualified institutional buyers, but were sold to non-QIBs.
That conduct resulted in violations of several MSRB rules, according to FINRA, including G-27 as well as rules G-17 on conduct of municipal securities and municipal advisory activities, G-15 on confirmation, clearance, and settlement, G-19 on suitability of recommendations and transactions, and G-47 on time of trade disclosure.
“Hennion & Walsh's written supervisory procedures prohibited the sale of bonds below the minimum denomination (absent circumstances not present here) and required periodic reviews to ensure compliance with this and other MSRB rules,” FINRA said in the settlement document. “However, the firm did not have adequate systems or controls in place to detect and monitor sales below the minimum denomination or ineligible purchasers and therefore did not perform any reviews specific to [the] minimum denomination of bonds with QIB restrictions.”