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Investor Protection

Some ‘Oops’ Moments with Municipal Bonds

May 18, 2020

by Howard Haykin



Errors, omissions and oversights happen to the best of firms. Take, First Manhattan, a broker-dealer with a near spotless compliance record throughout its 60 years in business. The firm failed on 7 occasions to purchase municipal securities for its customers at prices that were fair and reasonable in relation to prevailing market conditions.  



HOW THAT HAPPENED.    First Manhattan placed nearly all its customer municipal securities transactions (purchases and sales) with one unaffiliated dealer, which undoubtedly provided excellent services and prices. And, with a practice of doing most of its municipal business with just one dealer, First Manhattan no longer considered prices being offered by other broker-dealers. That was an isolated lapse in judgment.


As a result, on 7 occasions in July and August 2015, First Manhattan paid too much on purchases of municipal bonds for customers – by a total of more than $48,000. To settle these charges, First Manhattan compensated in full its overcharged customers, agreed to pay a $100,000 fine, and implemented new written supervisory procedures (‘WSPs’) that required the firm to compare the pricing of each muni securities transaction against the marketplace.



INVESTOR TAKEAWAYS.    Because they're not traded on an exchange, municipal securities' market prices are not as transparent as, say, stocks traded on the NYSE. So, investors must invariably rely on the good faith of, and supervisory procedures in place at, their broker-dealers. And occasionally the oversight of securities regulators.



[For further details, click on … FINRA Case #2015047927501.]