WASHINGTON – Centennial Securities Co. and Ziegler agreed to pay a total of $75,000 to settle Financial Industry Regulatory Authority charges over trading munis below the required minimum denominations and failing to disclose potential conflicts of interest to issuers.
These two cases were among FINRA’s monthly disciplinary actions released on Friday. FINRA also permanently barred Kenneth Lee Jones from Morgantown, West Va., from the securities industry in any capacity for his lack of cooperation in an investigation. The two firms and individual neither admitted nor denied FINRA's findings but agreed to the sanctions.
Grand Rapids, Mich.-based Centennial Securities was fined $45,000 and required to offer rescission to customers who traded the munis at below minimum denominations at either the original purchase price or the current market value, whichever is higher. It was also ordered to revise its written supervisory procedures.
FINRA found that from Dec. 1, 2013 through Dec. 31, 2014, the firm executed 25 customer transactions in a muni in an amount that was lower than the minimum denomination set by the issuer and that did not qualify for an exception to that requirement. This conduct violated Municipal Securities Rulemaking Board Rule G-15 on confirmation, clearance and settlement of transactions with customers, FINRA said.
The firm also failed to disclose to a customer at the time of trade that 36 munis were below the minimum denomination. “In Notice 2002-05, the MSRB stated that a dealer should consider a transaction below an issuer’s minimum amount to be a material fact that generally requires disclosure to a customer,” FINRA said. This failure violated Rule G-17 on conduct of muni securities and muni advisory activities or G-47 on time of trade disclosure for trades executed on or after July 5, 2014.
The self-regulator also said the firm did not have adequate supervisory procedures, violating G-27 on supervision. Centennial took corrective action on its supervisory procedures, including requiring a bond trader to review each official statement for an offering and to then annotate the order tickets for all munis needing to comply with minimum denomination requirements.
Centennial Securities told The Bond Buyer that while it "acknowledges responsibility for this unintentional and isolated incident, it should be noted that the bonds were sold in denominations thought to be most beneficial to the firm’s individual customers" and that " neither the firm’s registered representatives nor senior management had any intention of circumventing the required minimum denomination rule." In addition, the firm said, "None of [its] customers were harmed by the identified technical violation.”
FINRA found that Chicago-based Ziegler, on three occasions, between September 2014 and May 2015, executed a customer purchase of a muni in an amount below the required minimum denomination, without first determining that the trades were the result of the liquidation of an entire position already below that amount. This conduct violated G-15, the self-regulator said.
On 52 occasions in December 2013, Ziegler executed customer transactions in a muni below the minimum denomination without providing a written statement to the customers at or before the trade informing them the amount was below the minimum denomination and might adversely affect their liquidity in the position. This failure violated G-15 and G-17, FINRA said.
Ziegler’s business includes acting as an underwriter in muni offerings servicing conduit borrowers, the self-regulator said. From May 2014 to December 2014, Ziegler was party to a referral agreement to solicit conduit borrowers on behalf of a third party registered investment advisor with whom it was formerly affiliated: ZCM.
Ziegler would receive referral fee compensation if conduit borrowers retained ZCM to provide certain investment advisory services. MSRB Rule G-17 requires an underwriter in a negotiated deal to disclose to an issuer in its engagement letter any actual of potential material conflicts of interest Ziegler did not disclose the potential conflict until later in issuer presentations or in connection with the preparation of official statements, FINRA said.
FINRA barred Jones from the securities industry after he refused to provide FINRA with on-the-record testimony about questionable activities.
Jones was fired by Aegis Capital Corp. in May of this year after he had been a general securities representative there for seven years. The cause for the termination was his failure to disclose outside business activities. Jones has been associated with HD Vest Investment Services in an unregistered capacity since May 30, 2017.
FINRA had attempted to get Jones’ on-the-record testimony about the circumstances surrounding his termination and muni bond trades that he performed while at the Aegis Capital. Jones, through his lawyer, acknowledged recieving FINRA's requested but refused to appear.