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Regulatory Sanctions

'Rocky Mountain High' Markups on Corporate Bonds

February 19, 2019

by Howard Haykin


A Centennial, CO-based broker-dealer was caught charging customers an excessive mark-ups on principal transactions involving a single corporate bond. To settle FINRA charges, the firm agreed to pay a $45K fine and pay out $43K in restitution to affected customers.


FINRA occasionally detects instances where a member firm has charged its customers excessive mark-ups on principal transactions. When that happens, one would expect FINRA to extend the scope of its review to determine the full extent of the violative conduct, and to base any subsequent fines and restitution on the findings of its expanded testwork.
Here's what's puzzling about this case: FINRA found that a large number of excessive mark-ups had been applied to transactions involving a single corporate bond over the course of just a one-month period. Yet, there’s no indication that FINRA examiners extended their review beyond the original 3-month "review period" (July 1 through September 30, 2015).
Which leave us with at least 3 open-ended questions or suppostions:
  • Were these violations truly isolated instances – i.e., “one off” situations – which are not indicative of this broker-dealer's usual compliant business approach?
  • Were excessive mark-ups applied on this single group of bond transactions because the firm was more accustomed to selling bonds to customers on an agency, rather than a principal, basis?
  • Was a new or substitute trader manning the bond desk at the time the excessive mark-ups were applied?



WHAT WENT WRONG.    From August 28, 2015 through September 25, 2015, the broker-dealer, which has been a FINRA member since 1977, charged its customers prices that were not fair in 71 principal transactions involving a single corporate bond. The mark-ups ranged from 4.64% to 4.84% (from 8/28-9/17) and from 5.01% to 5.07% (from 9/21 to 9/25). In all instances, the broker-dealer had sold the bonds on a principal basis to its customers after it purchased those bonds from other broker-dealers.



FINRA Rule 2121, Fair Prices and Commissions, provides that … “In securities transactions ... if a member buys for his account from his customer, or sells for his own account to his customer, he shall buy or sell at a price which is fair, taking into consideration all relevant circumstances, including market conditions with respect to such security at the time of the transaction, the expense involved, and the fact that he is entitled to a profit…”



This recent case was reported in FINRA Disciplinary Actions for February 2019.

For further details, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015047738901.