PHOENIX – National Financial Services and Corecap Investments have agreed to settle Financial Industry Regulatory Authority charges that they violated Municipal Securities Rulemaking Board rules by ignoring underwriting instructions and failing to report trades.
Boston-based NFS agreed to pay $45,000 and Corecap from Southfield, Mich. agreed to pay $12,500 in settlement agreements filed late last month.
The firms neither admitted nor denied FINRA’s findings. NFS declined to comment and Corecap did not respond to a request for comment.
In both cases, the conduct dated back several years.
FINRA found that NFS, which provides municipal underwriting services through its division Fidelity Capital Markets, violated the MSRB’s Rule G-17 on fair dealing in 24 underwritings from March 2012 through March 2014. During that time, FINRA said, the lead underwriters on each offering instructed the firm to give in-state retail customers priority over retail customers from other states.
“In each of the 24 offerings at issue, NFS provided only partial fills on in-state retail customer orders prior to allocating securities to out-of-state retail customers,” FINRA found. “NFS should have interpreted the pricing wire instructions from the lead underwriters to require that orders from in-state retail customers be completely filled prior to filling any out-of-state retail customer orders. In the 24 offerings at issue, NFS could have provided full allocations to all in-state retail customers given its allotment of securities from the syndicate, but, instead, [only] partially filled orders for some in-state retail customers so that it could also allocate securities to out-of-state retail customers. As a result, 43 in-state retail customers could have received full allocations but received only partial allocations.”
FINRA fined Corecap for violating MSRB Rules G-14 on reports of sales or purchases andG-27 on supervision when it failed to report 26 of 87 muni transactions between Jan. 16, 2014 and May 24, 2016. Corecap had contracted with its clearing firm to report the firm’s securities transactions to the Real-Time Transaction Reporting System (RTRS), FINRA found. But ultimate responsibility for timely reporting of trades remains with broker-dealers under MSRB rules. Due to a coding error at the clearing firm, some of Corecap's muni transactions were not reported to the RTRS in violation of G-14.
Furthermore, FINRA found, Corecap “failed to establish and enforce a supervisory system reasonably designed to achieve compliance with its trade reporting obligations” as required by G-27. The firm’s written supervisory procedures required supervisors to regularly receive the MSRB Customer Transaction Edit Register and to review, initial, and date it as part of the firm's supervisory system, but the firm did not do so during the period FINRA reviewed. Because of that, the firm did not discover that its clearing firm was not reporting Corecap's transactions to the RTRS.