[Image: by DullHunk (Duncan Hull) / Flickr.com]

by Howard Haykin

National Financial Services, a Fidelity company, agreed to pay a $45K fine to settle FINRA charges that it failed to give the required priority to in-state retail customers over retail customers from other states in numerous municipal securities offerings.

BACKGROUND.    National Financial Services, or NFS, a Boston, MA-based broker-dealer, has been a FINRA member since 1983. The firm has over 1,400 registered personnel and 15 branch offices. Among other services, NFS provides municipal underwriting services through its division, Fidelity Capital Markets. NFS is also registered with the MSRB.

FINRA FINDINGS.    From March 2012 through March 2014 (the ''Relevant Period"), NFS participated as an underwriter in 24 municipal securities offerings issued by various states. The lead underwriters for those offerings communicated ‘priority instructions’ that required that orders from in-state retail customers be given priority over retail customers from other states. Specifically, the pricing wires sent to NFS for the 24 offerings in question specified that the priority of orders during the retail period was to fill in-state retail orders ahead of out-of-state retail orders.

However, in each of the 24 offerings at issue, NFS provided only partial fills on in-state retail customer orders prior to allocating securities to out-of-state retail customers. NFS should have interpreted the pricing wire instructions from the lead underwriters to require that orders from in-state retail customers be completely filled prior to filling any out-of-state retail customer orders. In the 24 offerings at issue, NFS could have provided full allocations to all in-state retail customers given its allotment of securities from the syndicate, but, instead, NFS partially filled orders for some in-state retail customers so that it could also allocate securities to out-of-state retail customers. As a result, 43 in-state retail customers could have received full allocations but received only partial allocations.

MSRB Rule G-11 requires … specific communications between the senior manager (the lead underwriter responsible for “running the order book”) and the syndicate (a group of B/D’s formed to purchase a new issue of municipal bonds and resell them to the public). In this regard, a dealer may not allocate municipal bonds in a manner other than in accordance with the ‘priority provision’ unless the issuer permits the senior manager or managers to do so on a case-by-case basis.

MSRB Rule G-17 establishes that … municipal securities dealers, including underwriters, have a duty to deal fairly with all persons. This fair dealing obligation requires an underwriter to follow an issuer’s directions in a retail order period. It also requires that underwriters take reasonable steps to ensure that orders submitted during a retail order period in fact meet the issuer’s conditions.

FINANCIALISH TAKE AWAYS.   CHECKLISTS. CHECKLISTS. CHECKLISTS. No doubt Fidelity maintains a checklist when it participates in a muni bond offering. So, what went wrong - IN 24 OFFERINGS? Did these checklists include the 'priority provision'? And if it did, which is likely, why was this requirement not fulfilled? Given the scope of NFS's violations, it's seems like the firm got off easy with a $45,000 fine. 

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

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2014039067601.