Subscribe to our mailing list

* indicates required







We seek to provide information, insights and direction that may enable the Financial Community to effectively and efficiently operate in a regulatory risk-free environment by curating content from all over the web.


Stay Informed with the latest fanancialish news.




Regulatory Sanctions

Broker Sold Unsuitable Municipal Bonds – Was the Firm At Fault?

March 12, 2018

by Howard Haykin


A registered rep (“RR”) with Citigroup Global Markets was hit with a $10K fine and a 2-month suspension on FINRA charges that he recommended an unsuitable non-investment grade, speculative-rated municipal bond to a recently retired married couple.


FINRA FINDINGS.    At the time of the ‘violation’, the RR had 9 years’ experience with 4 firms. The couple in question had just started retirement, and had an investment profile that included an investment objective of income and growth and a conservative risk tolerance.


The proceeds of the bond in question, California Statewide Communities Development Authority Revenue Bond, were earmarked for the Thomas Jefferson School of Law to finance the acquisition, construction and improvements of a multi-story building for the new law school campus in San Diego, CA. The Offering Memorandum for the bond stated, among other things, that the Bond "involve[s] risks that may not be appropriate for certain investors" and "will be sold only to purchasers who are Approved Institutional Buyers" and extended this restriction to sales in secondary market transactions. By July 2013, the Standard & Poor's Rating Service had downgraded the Bond to a non-investment grade, speculative credit rating of BB.


Approved Institutional Buyers included insurance companies, registered investment companies, employee benefit plans, and small business companies that own and invest on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the entity.


So, FINRA was correct in concluding that the RR did not have a reasonable basis to believe that this particular non-investment grade, speculative-rated bond was suitable for his customers.


FINANCIALISH TAKE AWAYS.    We're apparently presented with a case in which there are several elephants in the room, namely:

  • Was Citigroup Global Markets (“CGMI”) negligent in not restricting the sale of the bond to “Approved Institutional Buyers?”
  • Was the RR’s supervisor negligent for not adequately identifying the unsuitable recommendation?
  • How did the RR learn about this particular muni bond issue and how would he have had access to the Offering Memorandum?


CGMI may have been negligent on 2 counts: (i) for not prohibiting the sale of this bond to retail customers; and, (ii) for not adequately supervising this broker. However, FINRA BrokerCheck records indicate that the firm was never sanctioned for such 'violations'.


In terms of the third "elephant" in the room, FINRA provides scant information in its case write-up that would enable a reader to understand the “why’s and wherefore’s” of the RR’s recommendation. This is unfortunate, because muni bonds are sold every day to customers, particularly those in retirement who seek a steady tax-free flow of income, and firms may be fully aware as to how they can readily identify 'good' from 'bad' muni bonds.


The Take Away is that muni bonds should not get a "free pass." Adequate due diligence and oversight is needed at the firm level to ensure that RRs have a proper basis for recommending muni bonds.This might include appending restrictive codes to investments in order to prevent RRs from entering purchase orders for unsuitable bond issues.


This case was reported in FINRA Disciplinary Actions for November 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016048911301.