[ by Howard Haykin ]

 
FINRA announced on Thursday sanctions against 5 major broker-dealer banks for allegedly violating MSRB fair dealing and supervisory rules - all pertaining to municipal and state bond offerings.  FINRA found that each firm had unfairly and inappropriately obtained reimbursement of fees they had paid to the California Public Securities Association - "Cal PSA," a lobbying group - from the proceeds of municipal and state bond offerings.

Who Got Sanctioned What.    FINRA sanctioned the following firms:
•    Citigroup – $888K fine and $391K in restitution.  [$1.3Mn total]
•    Goldman Sachs – $568K fine and $116K in restitution.   [$684K total]
•    JP Morgan – $466K fine and $167K in restitution.  [$633K total]
•    Merrill Lynch – $787K fine and $287K in restitution.  [$1.1Mn total]
•    Morgan Stanley – $648K fine and $170K in restitution.  [$818 total]

All told, the firms were fined over $3.35 million and are orders to provide $1.13 million in restitution to certain issuers in California.  Of course, in settling these matters, the firms neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
 

FINRA Findings and Allegations.   Between January 2006 and December 2010 - a 5-year period - firms made payments to Cal PSA, an association that engages in a variety of political activities including lobbying on behalf of companies seeking to influence California state government, and [presumably the firms] requested that those voluntary payments be reimbursed as underwriting expenses from the proceeds of the negotiated municipal and state bond offerings.

FINRA views this practice as unfair because Cal PSA's activities did not bear a direct relationship to those bond offerings and payments to Cal PSA were not true underwriting expenses.  Also, the firms allegedly did not adequately disclose the nature of the fees to issuers;  nor had they established adequate or reasonable supervisory controls and each firm's WSPs failed to spell out detailed pols and procedures that would adequately supervise or monitor how money changed hands.  Finally, FINRA noted that all firms, except for JPMorgan, failed to have adequate systems or WSP pols and procedures for monitoring how muni securities associations, like Cal PSA used the funds that these firms paid.

FINRA EVP and Chief of Enforcement Brad Bennett, had this to say about the case:  "Issuers are entitled to know what they are paying for and why. It was unfair for these underwriters to pass along the costs of their Cal PSA membership to the municipal and state bond taxpayers, neglecting to disclose that these costs were unrelated to the bond deals.
 
FINRA Staff Credits.    Investigation by:  Carrie Dunican and Kristina Juntunen;  supervised by Gina Petrocelli, Susan Light, with assistance of Malcolm Northam, Cynthia Friedlander.

For further details, go to:   [ FINRA News Release, 12/27/12 ].  Also refer to the AWCs executed by each firm:  

• Citigroup Global Markets, Inc.     AWC  NO. 2010022049802.
• Goldman, Sachs & Co.    AWC NO. 2010022049803.
• J.P. Morgan Securities LLC.   AWC NO. 2009021126401.
• Merrill Lynch, Pierce, Fenner & Smith Incorporated.   AWC NO. 2010022049801.
• Morgan Stanley & Co. LLC.   AWC NO. 2010022049804.

Continue reading after the page jump for additional details, taken from Morgan Stanley's AWC.

Morgan Stanley & Co. LLC.   AWC NO. 2010022049804

RELEVANT DISCIPLINARY HISTORY.    In connection with FINRA Matter No. 2006005603101, dated October 2011, without admitting or denying them, Morgan Stanley consented to findings that it violated FINRA Rule 2010, NASD Rules 2110,2440,3010, and IM-2440, and MSRB Rules G-17, G-30(a), and G-27, based on findings, among others, that the aggregate price, including markups and markdowns, at which the Firm engaged in certain corporate and municipal ond transactions with customers was not fair and reasonable, and where the Finn's supervisory system for corporate and municipal bond markups and markdowns was not adequate. 

Morgan Stanley Smith Barney LLC consented to a censure and agreed to pay $1million in fines and $371K in restitution.  The Firm further agreed to revise certain WSPs. 

OVERVIEW.   Between January 2006 and October 2010 (the "Relevant Period"), Morgan Stanley violated fair dealing and supervisory rules of the MSRB by obtaining reimbursement for the voluntary payments that Morgan Stanley made to the California Public Securities Association ("Cal PSA"), on behalf of itself and other members of the underwriting syndicates, from the proceeds of municipal and state bond offerings.

During the Relevant Period, Morgan Stanley made payments to Cal PSA and requested that those payments be reimbursed as underwriting expenses from the proceeds of particular negotiated municipal and state bond offerings. This practice was unfair. Cal PSA's activities did not bear a direct relationship to those bond offerings, and were not expenses of conducting each underwriting. In addition, Morgan Stanley's requests for reimbursement were not fair because they were not accompanied by adequate disclosure to issuers about the nature of the fees. As discussed below, Cal PSA engaged in a variety of political activity.

Furthermore, Morgan Stanley failed to have adequate systems and written supervisory procedures reasonably designed to monitor the reimbursement process relating to expenses for municipal securities associations, including Cal PSA. In particular, Morgan Stanley's written supervisory procedures did not contain any policies requiring supervisors to review and approve Morgan Stanley's requests for reimbursement of those expenses to ensure that those requests were fair and  adequate. In addition, Morgan Stanley failed to have adequate systems and written supervisory procedures reasonably designed to monitor how the municipal securities associations used the funds that Morgan Stanley paid. The need for adequate policies and procedures in this area was heightened in light of Cal PSA's engagement in a variety of political activities.

By virtue of the above conduct, Morgan Stanley violated MSRB Rules G-17 and G-27.

As mentioned above, the firm agreed to pay $647,700 in fines and $170,054.80.

Further, within 180 calendar days, an officer of Morgan Stanley will provide written certification to FINRA that the firm has:  (a) completed a review of its WSPs and systems concerning the areas described above in above;  and, (b) implemented necessary revisions to such procedures and systems in order to ensure that the procedures and systems are in compliance with MSRB Rule G-27. The certification shall describe the specific actions taken by the Firm, including the systems and written procedures developed and implemented.