by Howard Haykin

In August, FINRA reported settlements with two broker-dealers involving wrongful sales of municipal bonds:

• Edward D. Jones & Co. agreed to pay a $210K fine, and to offer rescission to customers, to settle FINRA charges that it effected customer transactions in a municipal security in amounts lower than the minimum denomination of the issue.

• Comerica Securities agreed to pay a $32.5K fine, and to offer rescission to customers, to settle FINRA charges that it effected customers’ transactions in a municipal security in an amount lower than the minimum denomination of the issue.

BACKGROUNDS.   Edward Jones, a St. Louis, MO-based FINRA member in1939, has prior relevant disciplinary actions. In 2014 and in 2013, the firm paid $31K and $160K in fines and/or restitution, respectively, to settle FINRA charges related to sales of municipal securities to customers. Comerica Securities, a Detroit, MI-based FINRA member since 1986, has no relevant disciplinary history.

THE RULES.   MSRB Rule G-15(f)(i) prohibits a broker, dealer, or municipal securities dealer from effecting a customer transaction in municipal securities in an amount lower than the minimum denomination of the issue. This applies to muni securities issued after June 2002.

• Issuers set minimum denominations for the purchase or sale of municipal securities and, generally, 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 $5K to $100K, although an issue may set a minimum denomination at $100K or higher. One reason for setting a high minimum denomination is because the offered securities may not be appropriate for retail investors.
• There are 2 limited exceptions to executing transactions below the minimum denomination. However, neither is applicable to the Edward Jones or Comerica Securities cases.

EDWARD JONES CASE: FINRA FINDINGS.    Based on an examination of muni bond transactions for the 13-month period, December 2013 through December 2014, FINRA noted that Edward Jones:

• effected 188 customer transactions in a municipal security in an amount lower than the minimum denomination of the issue - separate and distinct violations of MSRB Rule G-15(f);

• failed, in 4 instances, to provide the customer a written statement at or before completion of the transaction informing the customer that the quantity of securities being sold is below the minimum denomination for the issue – separate and distinct violations of MSRB Rule G-15(f)(iii); and

• failed to disclose all material facts concerning 192 municipal securities transactions at or prior to the time of trade - separate and distinct violations of MSRB Rule G-17 (for conduct occurring before 7/5/14) and MSRB Rule G-47 (for conduct occurring on or after 7/5/14). Specifically, the firm failed to inform its customer:

►   that the muni securities transaction was in an amount below the minimum denomination of the issue, or
►   that the muni securities contained a resale restriction which could affect the liquidity of the customer's position.

COMERICA CASE: FINRA FINDINGS.    Based on an examination of muni bond transactions for the same 13-month period, December 2013 through December 2014, FINRA noted that Comerica Securites:

• effected 15 customer transactions in a municipal security in an amount lower than the minimum denomination of the issue - separate and distinct violations of MSRB Rule G-15(f);

• The firm's WSP’s did not provide for: (i) identification of the person(s) responsible for supervision with respect to the applicable roles; (ii) statement of the supervisory step(s) to be taken by the identified person(s); (iii) statement as to how often such person(s) should take such step(s); and, (iv) statement as to how the completion of the step(s) should be documented or evidenced.

FINANCIALISH TAKE AWAYS.    So far in 2017, at least 5 firms have been sanctioned for effecting muni bond transactions with customers in amounts beneath the minimum denomination: (i) GMS Group in February ($45K); (ii) FMSbonds in May ($210K); (iii) Fidelity in July ($45K fine); (iv) Edward Jones in August ($210K); and, (v) Comerica in August ($32.5K). In addition to fines, these firms had to offer rescission to affected customers.

Given the high cost of resolving these violations – in dollars, time and reputational damage – it would make sense for firms to ensure that their registered reps understand the MSRB rules so as to be in compliance. 

Both cases were reported in FINRA Disciplinary Actions for August 2017.

For details on the Edward Jones case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015046579901.

For details on the Comerica case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015046581901.