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B/D's Muni Bond Sales Were in Violation of MSRB Rules
by Howard Haykin
FMSbonds, Inc., agreed to pay a $210K fine and to offer rescission to customers to settle FINRA charges it effected customer transactions in a municipal security in an amount lower than the minimum denomination of the issue that were not subject to an exception under the rule.
BACKGROUND. Boca Raton, FL-based FMSbonds has been a FINRA member since 1979. In 2013, the firm agreed to settle FINRA charges that it had violated MSRB Rule G-17.
FINRA FINDINGS. For the period, 8/1/13 through 12/31/15, FINRA’s Market Regulation's Muni Securities Bonds Team and FINRA’s Member Regulation reviewed the firm's compliance with MSRB Rule G-15(f).
MSRB Rule G-15(f)(i) prohibits a broker, dealer, or municipal securities dealer from effecting a customer transaction in municipal securities issued after June 1,2002 in an amount lower than the minimum denomination of the issue.
Issuers set minimum denominations for the purchase or sale of municipal securities and disclose those minimum denominations in Official Statements, which are documents prepared by or on behalf of the issuer of municipal securities in connection with a primary offering. Minimum denominations generally range from $5,000 to $100,000.
An issuer may set a minimum denomination at $100,000 or higher to qualify for one of several exemptions from Securities Exchange Act Rule 15c2-12, which is designed to ensure production of certain disclosure documents in the primary and secondary markets. In addition, an issuer may set high minimum denominations because of a concern that the offered securities may not be appropriate for retail investors who are likely to purchase securities in relatively small amounts.
FMSbonds effected 170 customer transactions in a municipal security in an amount lower than the minimum denomination of the issue which were not subject to an exception under the rule. Some of those violative transactions involved sales to customers in sizes ranging up to $90,000 – which would indicate minimum denominations of $100,000. Such conduct would be in violation of MSRB Rule G-15(f).
FMSbonds also failed to disclose all material facts concerning 51 municipal securities transactions at or prior to the time of trade: (i) that the muni securities transaction was in an amount below the minimum denomination of the issue, or (ii) that the municipal securities contained a resale restriction which could affect the liquidity of the customer's position. Such conduct would be in violation of MSRB Rule G-17 and MSRB Rule G-47.
This case was reported in FINRA Disciplinary Actions for May 2017.
For details on this case, go to ... FINRA Disciplinary Actions Online, and refer to Case #2015043950501.