Conners & Co. agreed to pay monetary sanctions totaling more than $41,000 to help settle allegations by the Financial Industry Regulatory Authority that the firm violated municipal securities rules by charging unfair prices and not having an adequate supervisory system.
The firm, located in Cincinnati, Ohio, consented to FINRA's findings, contained in a settlement document accepted by FINRA on June 23, without admitting or denying them.
In addition to agreeing to pay a $20,000 fine and restitution of $21,111.29 plus interest, Conners & Co. consented to the imposition of a censure and also agreed to an undertaking to certify in writing that the firm has fixed the issues identified in the settlement document.
FINRA found that from April 2022 through December 2023, the firm charged customers an unfair price in 23 municipal securities transactions in violation of Municipal Securities Rulemaking Board Rules G-30 and G-17. The firm during that period also violated MSRB Rule G-27, according to FINRA. Rule G-27 sets forth requirements for dealers regarding supervision.
MSRB Rule G-30, which pertains to prices and commissions, says: no dealer "shall purchase municipal securities for its own account from a customer, or sell municipal securities for its own account to a customer, except at an aggregate price (including any mark-up or mark-down) that is fair and reasonable."
Rule G-30 Supplementary Material .06 says a dealer that's "acting in a principal capacity in a transaction with a customer and is charging a mark-up or mark-down must mark-up or mark-down the transaction from the prevailing market price."
The prevailing market price for a muni security "is presumptively established by referring to the dealer's contemporaneous cost or contemporaneous proceeds," FINRA noted in its findings.
"MSRB Rule G-30.06(a)(iii) provides that '[a] dealer's cost is (or proceeds are) considered contemporaneous if the transaction occurs close enough in time to the subject transaction that it would reasonably be expected to reflect the current market price for the municipal security,'" FINRA said.
In instances where the dealer's cost or proceeds are no longer contemporaneous, MSRB Rule G-30.06(a)(v) requires the dealer to consider — in the (A), (B) and (C) order they are listed — alternative types of pricing information to determine the prevailing market price. Listed as (A) are prices of any contemporaneous inter-dealer transactions in the muni security in question.
MSRB Rule G-17 requires that in conducting "its municipal securities or municipal advisory activities, each broker, dealer, municipal securities dealer, and municipal advisor shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice."
FINRA found that in 23 muni bond transactions between April 1, 2022, and Dec. 31, 2023, where Conners & Co.'s costs or proceeds were no longer contemporaneous, the firm "failed to consider appropriate pricing information, as identified in MSRB Rule G-30.06(a)(v), to determine the prevailing market price," according to the settlement document.
"In some instances, the firm continued to use its cost or proceeds as the prevailing market price even though it was no longer contemporaneous," FINRA said in its findings. "In other instances, the firm used inter-dealer bid or offer quotations to determine prevailing market price even though a contemporaneous inter-dealer transaction price was available."
For instance, on Aug. 30, 2022, Conners & Co. purchased muni bonds from another dealer at $97.50. On Sept. 12, 2022, the firm sold some of its inventory of that bond to a retail customer. Conners & Co. used its purchase price as the prevailing market price and applied a 2.56% mark-up, which resulted in the firm selling to the customer at $100.
There were, however, inter-dealer trades in the bond on Sept. 7 and Sept. 8 of that year at $96. If the firm had correctly determined $96 to be the prevailing market price and applied the same mark-up, Conners & Co. would have sold the bonds to the customer at $98.46. The customer instead overpaid by $1.54 per bond, which resulted in harm to that customer of $1,078.
"By failing to correctly assess the prevailing market price in 23 municipal bond transactions during the relevant period, firm customers paid more than they should have or received less than they should have in the total amount of $21,111.29," FINRA said in its findings. "Therefore, Conners & Co. violated MSRB Rules G-30 and G-17."
FINRA also found that during the relevant period, Conners & Co.'s supervisory system — including its written supervisory procedures — "was not reasonably designed to achieve compliance with MSRB Rule G-30."
Conners & Co.'s written supervisory procedures gave examples of types of information that could be weighed when determining prevailing market price but didn't require the firm to consider the types of pricing information listed in MSRB Rule G-30.06(a)(v), according to FINRA.
In addition, the firm's WSPs failed to prescribe how Conners & Co. would supervise prevailing market price determinations. In practice, when overseeing pricing determinations, the firm failed to ascertain whether the factors listed in MSRB Rule G-30.06(a)(v) had been considered, FINRA said.
"Therefore, the firm violated MSRB Rule G-27," FINRA said in its findings.
Conners & Co. did not respond to requests for comment.
